May was another good month, albeit one with some ups and downs. On the upside, the pandemic entered its endgame and corporate earnings blew away expectations. On the downside, the significant problems of success attending our move back to normal started to become apparent. Overall, May took us further along the road to normal, but it also began to reveal the bumps on that road.
Medical risks drop. On the medical front, case growth and deaths kept dropping during May, ending the month at levels last seen at the very start of the pandemic. The decline has continued in June, which suggests we now have the virus largely under control at the national level. Vaccinations have continued, with 4 of 10 people now fully vaccinated and more than half of our population having received at least one dose. When we combine those facts with the number of people who have probably been exposed, many states are now approaching herd immunity.
In May, we likely saw the end of the pandemic as a national risk factor, although some states and localities may still experience localized outbreaks. Most state economies are now fully reopened, and those that are not now have timetables to get there. May saw everyday life start the final phase of moving back to normal.
Economic risks rise. But while the pandemic is effectively over and the economy is reopening, May also saw the rise of several economic risks that had not been anticipated. They are the problems of success. Even as job openings have increased, job growth has dropped. Supply chains have jammed up on shortages of labor, chips, and pretty much everything else. The speed and magnitude of the economic recovery collided with the reality that global supply chains are not yet up to speed.
These issues caused a significant rise in inflation. As demand exceeded supply across the board, prices went up for many goods. Reports on consumer price inflation came in at the highest level in years, rattling financial markets and causing a pullback in many of them. May was the month that the pandemic risks bottomed, but the recovery risks rose.
Bumpy ride for markets. The financial markets responded to both the medical and economic news. As medical conditions kept getting better, the markets were pushed up. Helping drive this trend were the recent strong earnings reports. Both here and abroad, markets are in multimonth uptrends that reflect the continued improvement in the overall environment. Inflation fears spiked toward the middle of the month, however, which pulled the markets back. Overall, May was a bumpy month.
Mitigating those bumps, both here and abroad, governments continued to provide fiscal and monetary support. In the U.S., the Fed was quite clear that it expects inflation to be transitory. It will keep the party going until unemployment drops to pre-pandemic lows. As the Fed is effectively the central bank for the world, its actions have limited the economic damage from inflation fears.
Mixed results at month-end. Both the Dow and the S&P 500 showed gains for May, but the Nasdaq ticked down. Foreign markets did better, benefitting from the expected growth in the U.S., as well as continued vaccination progress in many countries. Both developed and emerging markets were up by more than the U.S. markets—something that has not been common in recent months.
Signals for economic growth. In June, we can expect more of what we saw in May. The medical situation should continue to improve, but that may have limited effect as we’re already close to the pandemic’s endgame. For the most part, people and the markets have already moved on. For the economy, the strength of demand should push hiring back up and keep confidence high. As a result, a consumer-led expansion should continue. June’s business confidence surveys show that business investment is likely to continue improving, which will provide another tailwind. Finally, data in early June signaled that some of the supply bottlenecks are starting to open, which could start to bring inflation down. These factors should support both economic growth and the markets.
A Fitting End to the Pandemic?
Looking back, May was a good month. In many ways, it marked a transition from a pandemic economy and markets to a more normal environment. In June, this trend should continue. Medical improvements should take the pandemic even further out of the picture. But hiring issues and overall growth are likely to place even more attention on the problems of success. June will likely be the first month where the problems of success—the good problems—outnumber the problems of the pandemic. And if that happens, which may come to pass, we will see a fitting end to the pandemic.