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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Market Performance Snapshot (Week ending February 19, 2021 and Year-to-Date)

  • Dow Jones Industrial Average®:  +0.1% | +2.9%
  • S&P 500® Index:  -0.7% | +4.0%
  • NASDAQ Composite® Index:  -1.6% | +7.7%
  • Russell 2000® Index:  -1.0% | +14.8%
  • 10-year U.S. Treasury note yield: 1.34%
    - Up 14 basis points from 1.20% on February 12, 2021
    - Up 42 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Energy, +3.1%
  • Weakest-performing S&P 500 sector this week: Health Care, -2.5%

    Past performance is not a guarantee of future results.

Stocks edge off recent highs amid weather and data turbulence

Equity markets took a pause from their recent upward push, digesting a mixed bag of economic data and the effects of severe weather that disrupted the energy grid in Texas. The 10-year Treasury yield continued to move higher, touching 1.36% on Friday, as investors anticipated economic growth and rising inflation in coming months.

  • Weekly new unemployment claims rose to 861,000, and the previous week’s claims were revised upward by 55,000 to 848,000. While business activity is picking up in many parts of the country, the labor market continues to show slack, which could keep a lid on wages and check nascent inflation.
  • The Federal Reserve reported that U.S. manufacturing activity rose 1% in January, nearly back to its pre-pandemic level.
  • December’s fiscal stimulus appeared to drive a surge in retail spending in January. Retail sales were 5.3% higher than in December, as cash payments and higher unemployment checks made their way to consumers.
  • Walmart said that U.S. sales in its fourth quarter, which ended January 29, rose 8.6% over the same quarter the prior year, while U.S. e-commerce sales grew 69%. However, the company also forecast that 2021 sales and earnings growth will ease from last year’s pace. The report sent Walmart stock down more than 5%. Shares of competitors Target and Costco also fell.
  • The cyclical rotation toward value stocks, including energy and financials, continued apace. Since the start of the year, ExxonMobil has increased 27% and JPMorgan Chase is up 16.5%, while Amazon is down 0.2% and Apple has declined 2.1%. This is a role reversal from much of last year, which saw big tech companies go on a torrid run while energy and financial stocks stagnated.
  • The 10-year Treasury yield’s rise in 2021 suggests that investors are optimistic about future economic growth. Keep in mind, however, that the real yield (the 10-year yield minus the expected rate of inflation) remains negative, as investors are expecting some level of inflation in 2021, along with continued support from the Federal Reserve.
  • Treasury yields also affect stock valuations, as low bond yields and borrowing costs make stocks more attractive and allow companies to generate higher returns on capital. Many suggest that a 10-year Treasury yield above 1.5% may negatively impact stock prices.
  • The speed at which yields rise is also a factor. Moderately rising yields signal economic growth, while rapidly rising yields could signal economic overheating and inflation. So far, policymakers at the Federal Reserve have shown little concern about the pace of rising Treasury yields, but investors should keep an eye on both bond yields and the pace of increase.

Texas power disruptions roil markets

Residents and businesses in Texas suffered widespread power and water outages through the week, as the state’s energy grid proved unable to withstand an extreme cold spell and winter storm. Energy prices rose, as production capacity was impaired, supply lines were disrupted, and demand rose markedly.

  • U.S. and international benchmark oil prices pushed past $60/barrel, the highest level in the past year. The situation in Texas added to previous upward pressure on prices. Supply restrictions from major producers, as well as expectations of increasing economic activity and relaxed restrictions on travel, have been driving oil prices higher.
  • Responding to the rise in prices, Saudi Arabia said it may reverse its production cuts after March.
  • Energy disruptions in Texas, as well as the rolling blackouts California has suffered in recent years, underscore the potential for continued investments in diversified, resilient energy sources.
  • Looking beyond energy, rolling blackouts in Texas forced major semiconductor manufacturers, including Samsung and NXP Semiconductors, to scale back output at their Texas manufacturing plants. This comes amid an ongoing shortage of semiconductor chips that is already causing problems in the automotive industry.
  • White House officials reached out to the Taiwanese government about resolving supply chain shortages affecting U.S. automakers. Taiwan is the world’s largest producer of semiconductor chips. President Biden also ordered his Administration to conduct a review of key global supply chains for semiconductors, rare-earth minerals used in advanced technology production, and other critical economic and defense components.

Final thoughts for investors

Economic data shows that the U.S. economy remains choppy, with both signs of growth and continued evidence of slack in the labor market. Investors are banking on economic growth, and potentially inflation, picking up pace as the year goes on. But major risks remain. COVID-19 is still with us, and, as we saw in Texas, unplanned events can have market repercussions. Speak with a financial professional about helping you to build a portfolio oriented toward your long-term goals.

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