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

Market Performance Snapshot (Week ending April 16, 2021 and Year-to-Date)

  • Dow Jones Industrial Average®:  +1.2% | +11.8%
  • S&P 500® Index:  +1.4% | +11.4%
  • NASDAQ Composite® Index:   +1.1% | +9.0%
  • Russell 2000® Index:  +0.9% | +14.6%
  • 10-year U.S. Treasury note yield: 1.59%
    - Down 7 basis points from 1.66% on April 9, 2021
    - Up 67 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Utilities, +3.5%
  • Weakest-performing S&P 500 sector this week: Communication Services, -0.02%

    Past performance is not a guarantee of future results.

Markets rise amid strong economic data and bank earnings

Major equity indices rose for the week, with the Dow Jones Industrial Average and S&P 500 notching new record highs, as more data suggested the U.S. economy is entering a period of accelerating growth. U.S. government bond yields fell. Major banks kicked off the quarterly earnings season with strong reports.

  • Retail sales rose 9.8% from February to March, according to the U.S. Department of Commerce. The surge in spending came as federal stimulus payments made their way to consumers and ongoing vaccinations allowed further economic reopening across much of the country. Spending in the restaurant category rose 13.4% as people ventured out more. Sporting goods, cars, and clothing also saw large increases.
  • Weekly initial jobless claims were reported at 576,000, the first time the total fell below 600,000 since the pandemic started.
  • Big banks, including Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo, reported strong earnings, with several setting new records for revenue or profit. Much of the banks’ revenue has come from Wall Street trading operations, while consumer loan demand has remained subdued. Federal assistance to individuals has kept loan defaults in check, allowing the banks to release reserves they had set aside to cover potential loan losses. The S&P 500 financial sector is up nearly 20% so far this year.
  • Many consumers’ personal balance sheets appear to be in good shape, as stimulus payments have made it possible to pay down debt and sock away cash. JPMorgan Chase CEO Jamie Dimon articulated a bullish outlook for the economy, saying American consumers are “coiled, ready to go, and they’re starting to spend money.”
  • The rotation from growth stocks to value, which dominated much of the first quarter, appears to have stalled. Over the past month, the Russell 1000® Growth Index has returned 10.0%, while the Russell 1000® Value Index has returned 3.7%. Year to date, the value index’s 14.4% return still outperforms the growth index’s 8.4%. But with value stocks recovering ground lost in 2020, we may be poised to see more variation within sectors as the economic recovery moves forward.
  • The temporary pause in administration of Johnson & Johnson’s vaccine while cases of blood clots are investigated was a reminder that continued economic progress in the U.S. and around the world is predicated on vaccines allowing economies to reopen and normal commercial life to resume. Any change to that plan could generate tremors in markets.
  • Separately, the CEOs of Pfizer and Johnson & Johnson, as well as an official on the Biden administration’s COVID-19 response team, said people will likely need vaccine booster shots annually to keep ahead of the virus. As a result, COVID-19 could be seen as a potential risk variable in longer-term economic and market scenarios.

Signs of inflation appear, but will they be transient?

The U.S. Department of Labor’s Consumer Price Index (CPI) revealed that prices rose 0.6% from February to March and 2.6% over the last 12 months. It was the largest monthly increase since 2012. Markets had been prepared for a reading in that range. The 10-year Treasury yield, which typically rises when inflation expectations rise, actually fell slightly after the report.

  • Because consumer prices started to fall last March as economic shutdowns went into effect, the year-over-year CPI figure may be slightly artificially elevated. This “base effect” is likely to be more pronounced over the next two months. However, the sharp rise in month-over-month inflation suggests that current economic conditions –including rising consumer demand and global supply chain issues – are putting upward pressure on prices.
  • Federal Reserve leaders reiterated their view that inflation will temporarily rise before settling back down, and that the Fed won’t take action prematurely. Fed Vice Chair Richard Clarida said the bank looks at several measures of economic performance – not just inflation data – to determine the strength of the economy and the need for action: “We are going to be very attentive to what we are seeing in the nexus between wages, productivity, prices, and markups.”
  • Fed Chair Jerome Powell sought to reassure markets that any change in Fed interest rate policy would most likely come only after the Fed reduces its purchases of U.S. government bonds and mortgage-backed securities, which are currently running at $120 billion per month. “We will taper asset purchases when we’ve made substantial further progress toward our goals,” Powell said in a speech. “That would in all likelihood be before –well before – the time we consider raising interest rates.”
  • Markets will continue trying to anticipate when the Fed will start to remove monetary support from the economy – and particularly if it will be forced to act sooner than planned because inflation appears to be higher or more sustained than expected. After the 10-year Treasury yield rose sharply in the first quarter, it appears to have stabilized in a range between 1.5% and 1.8%, suggesting that markets have baked in their inflation expectations and will wait for further data to confirm or undermine those assumptions.

Final thoughts for investors

Economic data makes a compelling case that the U.S. economy is on the mend. But risks remain – potentially from inflation running hotter than anticipated, hiccups in vaccine distribution, or unforeseen events disturbing markets. Speak with a financial professional about how best to manage risk as you work toward your long-term investing goals.

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