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Main Street Sentiment Remains Strong Despite Risks from Speedy Recovery

Main Street Sentiment Remains Strong Despite Risks from Speedy Recovery

July 16, 2021
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Sentiment on Main Street remains strong as the U.S. economy continues to move towards normalcy, but concerns about the impact of a strong but uneven recovery are rising as higher prices, supply chain bottlenecks, and trouble finding qualified workers weigh on businesses’ ability to expand.

As shown in the LPL Chart of the Day, Main Street sentiment is at its second highest level in over a decade according to LPL Research’s proprietary Beige Book Barometer (BBB), topped only by the June 2021 BBB reading. The result is based on our analysis of the Federal Reserve’s (Fed) Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” The BBB gauges sentiment by looking at how frequently key words and phrases appear in the text.

In the most recent Beige Book, “strong” words had declined slightly while “weak” words fell to their lowest level since the BBB’s inception in 2005. However, expressions of uncertainty had increased and the report did note broad-based pricing pressures. Our sub-index of inflation-related words in the Beige Book remained at its highest level since we created the inflation sub-index in 2015.

“The economy is picking up speed but has not yet returned to pre-pandemic levels,” said LPL Financial Chief Market Strategist Ryan Detrick. “We expect the return to normalcy to continue to support economic growth, but the speed of the recovery also comes with some hazards.” (For more on LPL Research’s economic outlook and its potential impact on markets, see its recently released Midyear Outlook 2021: Picking Up Speed ).

See enlarged chart.

Mentions of COVID-related words (virus, COVID, pandemic) continued to fall in the most recent Beige Book, as they have in every Beige Book since January, even falling below the level of their initial appearance in March 2020. More concerning, in addition to the persistence of inflation-related words, supply chains also received frequent mention and mentions of shortages remained elevated. The downside of the economy’s rapid acceleration has been a mismatch between demand, which can ramp up quickly, and supply, which comes on line more slowly, while labor markets have also been slow to keep pace with reopening.

Nevertheless, the fundamental backdrop for the economy remains positive. Upside risks from inflation and disruptions from the Delta COVID variant are on-going risks, but we continue to expect inflation to start to subside as the economy normalizes. Global vaccine distribution will help limit the impact of the Delta variant, although it has led to some new restrictions. US economic acceleration will probably peak in the second quarter, but there’s still plenty of scope for growth to moderate and still remain above average. Much of the positive news is already priced in for equity markets, which are forward looking, and gains may not come as easily, but we still see solid potential for upside as the economy continues to rebound and potentially gains additional support from an improving global economy.

 

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index and market data from FactSet and MarketWatch. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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