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

Market Performance Snapshot (Week ending May 7, 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  +2.7% | +13.7%
  • S&P 500® Index: +1.2% | +12.7%
  • NASDAQ Composite® Index: -1.5% | +6.7%
  • Russell 2000® Index: +0.2% | +15.0%
  • 10-year U.S. Treasury note yield: 1.57%
    -  Down 6 basis points from 1.63% on April 30, 2021
    -  Up 65 basis points from 0.92% on December 31, 2020
  •   Best-performing S&P 500 sector this week: Energy, +8.9%
  • Weakest-performing S&P 500 sector this week: Consumer Discretionary, -1.2%

    Past performance is not a guarantee of future results.

Dow and S&P 500 hit new records as inflation concerns unsettle technology stocks

The reopening trade reappeared on Wall Street, with energy, materials, and financial stocks propelling the Dow Jones Industrial Average and S&P 500 to new closing highs. Technology stocks sputtered after comments from Treasury Secretary (and former Fed chair) Janet Yellen raised the specter of interest rate increases to curb inflation, however the NASDAQ Composite rallied nearly 1% on Friday after an unexpectedly weak jobs report eased investor fears that the Fed could start removing monetary stimulus earlier than anticipated. 

  • In an interview on Tuesday, Sec. Yellen said that, with major increases in government spending on the way, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.” Yellen later clarified the remarks: "Let me be clear, it's not something I'm predicting or recommending…. I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it.”
  • While inflation and the Federal Reserve’s timing on policy changes have been at the top of investors’ minds for months, the mere mention of interest rate increases by a high-ranking policy official stoked concern that the Fed might have to act sooner rather than later to reduce asset purchases and ultimately raise rates.
  • Fed officials reiterated that they believe inflation in coming months will be transitory and that they will wait to adjust policy until the economy is on solid ground and the labor market experiences broad recovery.
  • Other global central banks have begun to signal policy changes. The Bank of England raised its forecast for 2021 growth in the UK economy to 7.5% and said it would reduce its weekly bond purchases by 1 billion pounds a week while maintaining the overall size of its bond-buying program at 895 billion pounds. The Bank of Canada last month reduced bond purchases by 1 billion Canadian dollars per week and said it expects interest rate increases at the end of 2022.
  • Mohamad El-Erian, the former head of Harvard University’s endowment and former CEO of PIMCO, wrote in the Financial Times that if the Fed doesn’t start signaling policy changes soon, it may be forced to act more aggressively when the changes do come: “Ultimately, the Fed may be forced to slam on the monetary policy brakes, risking undermining what should be a long-lasting inclusive recovery.” El-Erian added, “It’s time for [the Fed] to taper its market interventions for the longer-term wellbeing of the economy and the structural health of financial markets.”
  • Inflation and interest rate fears made a U-turn on Friday, as the April payroll report came in weaker than expected. While broader economic indicators are still signaling robust U.S. growth, the path back to full employment could be uneven, boosting the Fed’s rationale for keeping the stimulus taps open.
  • Throughout this year, the NASDAQ Composite – which consists of many technology stocks that are sensitive to interest-rate changes – has risen and fallen along with rising and falling concerns about inflation and interest rates. That trend may continue as uncertainty over inflation grows.
  • It's worth noting that despite the flurry of concerns about rising inflation, the 10-year Treasury yield fell 6 basis points during the week.

Labor market improvement sputters; vaccine providers report strong earnings

The Labor Department’s monthly payroll report for April showed a gain of just 266,000 jobs, well short of the million or so jobs most Wall Street economists expected. March’s job gains were also revised down, though February’s were revised up. The economy is still about 8 million jobs below pre-pandemic levels.

  • The leisure and hospitality sector added jobs robustly in April, as vaccinations and falling virus caseloads allowed for further economic reopening. The largest job losses were in the temporary help category. The manufacturing sector also reported job losses, which may stem from automotive assembly line shutdowns related to the global semiconductor shortage.
  • Average hourly wages and average hours worked both rose in April. That could be another sign of inflationary pressure in the economy.
  • In addition to the monthly jobs report, the latest weekly report on new unemployment claims came in at 498,000, the first time the figure has been below 500,000 since the start of the pandemic. However, this number has been volatile and prone to upward revision.
  • Two vaccine makers reported strong earnings during the week:

    -  Moderna reported its first-ever quarterly profit, as vaccine sales contributed $1.73 billion to the company’s total revenue of $1.94 billion. In the same quarter of 2020, Moderna reported revenue of $8 million.
    -  Pfizer, a more mature and diverse pharmaceutical company than Moderna, also reported strong sales from its vaccine, which accounted for $3.5 billion of the company’s $14.6 billion in quarterly revenue. Pfizer raised its forecast for vaccine sales this year from $15 billion to $26 billion.
  • On Wednesday, the Biden Administration announced that it would support an initiative to waive vaccine patents in an effort to increase vaccine supply in poorer countries. Vaccine makers had already agreed to provide vaccines at low or no cost in developing countries, so it’s unclear what effect the move could have on the companies’ bottom lines. After the news, Moderna’s stock price fell more than 15% and Pfizer’s declined about 5% before both companies regained ground late in the week.

Final thoughts for investors

The inflation question is likely to unsettle markets until the Federal Reserve provides a clearer roadmap for when and how it will reduce monetary stimulus. Other uncertainties also remain, including the details of government spending and tax plans, the effect of supply chain disruptions on companies’ financial results, and, of course, the progress of vaccines in combatting the virus and its variants globally. Speak with a financial professional about staying on track toward your long-term goals.

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