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

Market Performance Snapshot (Week ending April 23, 2021 and Year-to-Date)

  • Dow Jones Industrial Average®:  -0.5% | +11.3%
  • S&P 500® Index:  -0.1% | +11.3%
  • NASDAQ Composite® Index:   -0.3% | +8.6%
  • Russell 2000® Index:  +0.4% | +15.0%
  • 10-year U.S. Treasury note yield: 1.56%
    - Down 3 basis points from 1.59% on April 16, 2021
    - Up 64 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Real Estate, +2.0%
  • Weakest-performing S&P 500 sector this week: Energy, -1.8%

    Past performance is not a guarantee of future results.

Equities experience a choppy week as earnings reports continue

Major equity indices dipped early in the week before bouncing up and down through the rest of the week. The three large-cap indices ended the week slightly lower, while the small-cap Russell 2000 index finished slightly higher. Earnings reports showed generally strong corporate performance, but high equity valuations are leading to high expectations for future earnings. Potential policy proposals around taxes and climate also exerted some effect on markets. Government bond yields were largely steady.

  • The tale of two pandemic “winners” illustrates the challenge of providing earnings projections that satisfy markets at a time of high equity valuations.
    - Netflix, which experienced huge subscriber and revenue gains as people stayed home over the past year, saw slower subscriber growth in its most recent quarter and projected that subscriber numbers for the rest of the year will grow modestly. Consumers will have more entertainment options outside the home, as well as access to more streaming outlets. While Netflix did produce strong revenue and profit in the quarter, the stock tumbled around 8% after the earnings report and finished the week down 7.5%.
    - Procter & Gamble, which benefitted from surging demand for household supplies during the pandemic, projected further growth as the economy continues to move into recovery mode. P&G also raised its forecast for spending on commodity inputs and increased its quarterly dividend. The company’s stock was down 2.4% for the week.
  • In response to higher commodity costs, P&G announced that it will raise prices later this year, confident that it can push rising costs onto consumers. Coca-Cola, which reported earnings and revenue above expectations, will also raise prices this year. Major consumer-product makers including Kimberly-Clark and J.M. Smucker have also announced price hikes. The ability to sustain higher prices will largely depend on economic growth accelerating as expected, and could add weight to the argument that inflation pressures are building in the U.S. economy.
  • Weekly initial jobless claims fell again, reaching a new pandemic-era low of 547,000. This signals continued, incremental labor-market improvement.
  • News reports that President Biden will seek to raise the top capital gains tax rate from the current 23.8% to around 43% to pay for a variety of spending proposals appeared to contribute to a drop in equities on Thursday. No firm details have been released, and markets seemed to shake off the concern Friday, with major indices rising again.
  • In remarks at a virtual White House climate summit on Thursday, President Biden announced a new goal to
    cut U.S. greenhouse gas emissions in half from their 2005 levels by 2030. Other world leaders made similar commitments. While many policy details still need to be fleshed out, one could potentially look to the technology, materials, energy, and utilities sectors for opportunities.

Pay attention to potential risks from multiple sources

Markets are expecting strong economic growth in the U.S. and moderate economic growth elsewhere this year, yet the forecast is far from certain. Risks from multiple sources remain.

  • Markets are exhibiting some concern over the rising number of virus cases around the globe, which could trim expectations for economic growth in the regions most affected. As Federal Reserve Chairman Jerome Powell and other market observers have noted, the path forward for the global economy is still highly dependent on getting and keeping the virus and its variants under control.
  • Following its most recent meeting, the European Central Bank (ECB) reaffirmed its highly accommodative monetary policies, recognizing the ongoing pressure European economies face as intermittent lockdowns continue. Vaccine rollouts had been slow across the continent, but seem to be picking up pace. However, the ECB doesn’t expect the eurozone economy to return to pre-pandemic levels until mid-2022, about a year after the U.S. is projected to reach that mark.
  • A CDC panel recommended resuming the use of Johnson & Johnson’s vaccine after investigating a small number of cases of serious blood clots in recipients. The panel recommended adding a warning label for women under 50, who appear most at-risk for the clots. European health regulators also allowed the vaccine to continue being used, with a warning about the clots. J&J’s earnings report revealed that vaccines contributed about $100 million to sales in the most recent quarter.
  • Historically large U.S. budget deficits could pose market risks. The U.S. budget deficit for the first six months of fiscal year 2021 (October through March) was a record $1.7 trillion – which came on top of a record $3.1 trillion deficit for fiscal 2020. While the spending has boosted economic growth through the pandemic, concerns about growing debt could crimp future spending or lead to tax increases, both of which could affect corporate results. And while global investors have been eager to hold U.S. government debt, any change in that dynamic could pose risks to bondholders.
  • Geopolitical risks may be on the rise. In recent weeks, the U.S. government sanctioned Russian officials in response to cyberattacks and election interference, and sent a delegation to Taiwan in response to a perceived increase in threats from mainland China. While markets have been mostly unaffected by the recent moves, any potential for increased uncertainty around geopolitical events should be viewed as a market risk.

Final thoughts for investors

With asset valuations high, markets are looking for evidence that companies which thrived during the pandemic can continue growing in a more normalized economic environment. Elevated market expectations and ongoing global risks could add volatility to asset prices and market performance. Speak with a financial professional about how best to stay on track toward your long-term investing goals.

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