Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot (Week ending July 16, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: -0.5% | +13.4%
- S&P 500® Index: -1.0% | +15.2%
- NASDAQ Composite® Index: -1.9% | +11.9%
- Russell 2000® Index: -5.1% | +9.5%
- 10-year U.S. Treasury note yield: 1.30%
- Down 6 basis points from 1.36% on July 9, 2021
- Up 38 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Utilities, +2.5%
- Weakest-performing S&P 500 sector this week: Energy, -7.7%
Past performance is not a guarantee of future results.
Stocks dip as investors digest inflation, earnings data
Major equity indices finished lower for the week – the Russell 2000 Index sharply lower – as markets struggled to decipher the future direction of the U.S. and global economies. June’s Consumer Price Index (CPI) revealed a continued rise in prices, though Federal Reserve Chair Jerome Powell maintained that price increases are likely to be transitory as supply and demand rebalance across industries. Additionally, the University of Michigan’s consumer sentiment index fell in early July, suggesting that inflation concerns may be clouding consumers’ outlook on the economy.
- The latest CPI report showed that prices rose 0.9% in June and 5.4% year-over-year, with most of the increase attributable to a few sectors. Used car prices rose 10.5%, contributing a third of the overall increase. Airline and hotel fares also rose sharply.
- While headline inflation figures continue to indicate surging prices, base effects from last year’s steep decline in economic activity are still at play. The Wall Street Journal noted that compared with two years ago, prices in June 2021 were up just 3.0% on an annual basis – still above the Fed’s 2% target, but less dramatically so.
- On Wednesday and Thursday, Fed Chair Powell testified before the House and Senate, acknowledging that inflation is currently “larger than we had expected,” while reiterating his conviction that price increases are mostly the result of temporary supply-demand imbalances as the economy recovers: “It’s just a perfect storm of high demand and low supply and it should pass. Unless we think there’s going to be a multi-year, many-year shortage of used cars in the United States, we should look at this as temporary. We very much think that it is.”
- Powell added that while the Fed wouldn’t hesitate to act if inflation seemed to be rising too high or for too long, he believes that substantial further progress on the Fed’s employment goals is still “a ways off,” and said the Fed “will provide lots of notice” before tapering asset purchases or raising interest rates.
- Major banks kicked off earnings season with generally strong reports. Balance sheets are healthy and profits are strong, however concerns about the direction of interest rates and falling trading revenue clouded the picture somewhat. Much of the positive news was already priced into bank stocks, which rose substantially through the first half of the year. The S&P Financials sector declined 1.6% for the week.
- The European Central Bank (ECB) updated its inflation target from just below 2% to a “symmetrical” 2% target, meaning the ECB will allow inflation to overshoot or undershoot the goal for a period of time. This approach mirrors the Fed’s update last year to its own 2% target. The ECB’s new policy may provide it more flexibility as the Eurozone economy recovers from the pandemic, though the central bank has already been very accommodative for the past year.
Treasury yields fall to start the third quarter
The 10-year Treasury yield finished the week at 1.30% – well below the 1.50%-1.75% range in which it spent most of the second quarter. Just a few months ago, a 2% yield looked possible in the near term, but global institutional investors have continued to buy U.S. Treasuries, which deliver higher yields than most other major government debt after hedging currency risk. In addition, concerns about the economic growth outlook stemming from virus uncertainty and longer-term structural trends have led some U.S. investors back to Treasuries.
- Unemployment data continues to point toward recovery, with weekly new unemployment benefit claims falling to a pandemic low of 360,000. More than 20 states have scaled back enhanced unemployment benefits as the economy re-normalizes.
- Retail sales unexpectedly rose in June by 0.6%, though May’s decline was a bit steeper than initially reported. Still, growing sales suggest the consumer remains well positioned to support ongoing economic recovery.
- A major variable in the growth outlook is the Delta virus variant, which has caused cases to surge above recent low levels. Some governments outside the U.S. have responded with renewed lockdowns. While the prospect of similar action in the United States may still be remote, new restrictions could harm economic growth and dent consumer confidence.
China’s economic outlook and government actions continue to bear watching
According to the latest government figures, China’s economy continues to grow, though questions remain about the sustainability of growth rates. Actions by the Chinese government, as well as tensions between the U.S. and China, continue to inject uncertainty into markets.
- China’s GDP grew 7.9% in the most recent quarter, in line with expectations, and both industrial production and retail sales were solid. However, China’s central bank made more liquidity available to banks to boost lending, particularly to small businesses. The stimulative move suggests concerns about future economic growth, as consumer prices in June rose just 1.1%, well below the central bank’s 3% target.
- The Chinese government continued its crackdown on Chinese tech firms. In one of the most high-profile moves to date, the government ordered ride-sharing app Didi, which recently completed an IPO in New York, to undergo a cybersecurity review and pulled the app from Chinese app stores. Regulators then ordered other tech companies considering listing abroad to undergo cybersecurity reviews and blocked a proposed merger of two large Chinese online gaming companies. The measures add another risk factor for investors in Chinese tech firms.
- The Biden Administration, with bipartisan support from Congress, continues to take a tough line on China –particularly over Beijing’s actions in Hong Kong and human rights concerns in the Xinjiang province. The U.S. and China remain closely connected economically, so frictions in the countries’ relationship could have market impacts.
Final thoughts for investors
While the economy and markets have performed well this year, uncertainty abounds. Lingering virus concerns, an opaque inflation forecast, and strong valuations are generating turbulence in markets and will likely continue to do so. Speak with a financial professional about preparing for uncertainty and staying on track toward your long-term goals.