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

Market Performance Snapshot (Week ending May 14, 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  -1.1% | +12.4%
  • S&P 500® Index:  -1.4% | +11.1%
  • NASDAQ Composite® Index:  -2.3% | +4.2%
  • Russell 2000® Index:  -2.1% | +12.6%
  • 10-year U.S. Treasury note yield: 1.63%
    - Up 6 basis points from 1.57% on May 7, 2021
    - Up 71 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Consumer Staples, +0.4%
  • Weakest-performing S&P 500 sector this week: Consumer Discretionary, -3.7%

    Past performance is not a guarantee of future results.

Inflation data unsettles stocks

All major indices moved sharply lower through the middle of the week as new data on consumer and producer prices underscored concerns about the pace of inflation. The indices recovered some ground late in the week, but still finished in the red. Government bonds also sold off, pushing the yield on 10-year U.S. Treasuries above 1.70% for the first time in more than a month before settling at 1.63%.

  • The Consumer Price Index (CPI) for April revealed a 4.2% jump in year-over-year prices, the sharpest spike since 2008. Core CPI, which excludes volatile food and energy prices, was up 3.0% year-over-year.
  • The annual surge in CPI was exaggerated somewhat by the fact that prices dipped in April 2020 as the pandemic took hold, meaning this year’s calculation builds off an artificially low base. However, short-term inflation measures were also high. The monthly core CPI increase from March to April was 0.9% – the highest figure since 1982.
  • The Producer Price Index, which reflects price changes from the seller’s perspective, was also high, rising 6.2% from April 2020 to April 2021 and 0.6% from March to April this year.
  • A U.S. Labor Department report on job openings and turnover showed a record 8.1 million openings at the end of March (the report lags by a month). The number of available jobs appears to be outpacing the number of available workers, which could add upward pressure to wages and inflation.
  • Meanwhile, the number of weekly new claims for unemployment benefits fell to a new pandemic-era low
    of 473,000.
  • Markets are clearly concerned that if inflation runs hotter than expected for longer than expected, the Federal Reserve will have to act sooner – and perhaps more aggressively – to reduce asset purchases and ultimately raise interest rates. Growth stocks, which are sensitive to interest rates, have been most volatile over the past few weeks, though all equity sectors suffered in the most recent sell-off. On Wednesday, the broad-market S&P 500 Index experienced its steepest decline since February.
  • Consumers are also expecting higher inflation. According to the May release of the University of Michigan’s widely watched index of consumer sentiment, consumers now expect 4.6% inflation over the next year, a jump from the 3.4% expected in April’s survey. Inflation expectations for the next five years rose to 3.1% from 2.7%. Overall, the University of Michigan index fell to 82.8 in May from 88.3 in April. Economists had been expecting it to rise.
  • Fed officials continue to reiterate that they anticipate the current rise in inflation to be temporary, and that they’re willing to let inflation run above their 2% long-run target for some period of time before pulling back on monetary stimulus.
  • Investors should keep a keen eye on inflation expectations and expect ongoing market gyrations as additional inflation data comes in over the weeks and months ahead.

Reopening continues to gather pace, though the tempo may vary

The latest retail sales report showed no growth in sales between March and April. However, March’s already-large jump of 9.7% was revised up to 10.7%. Even holding steady at such a high level of spending suggests consumers still have strong purchasing power, though the bump from government stimulus checks may be ebbing. The report provides another indication that the path to full economic recovery will be uneven.

  • It’s worth noting that spending at restaurants and bars increased by 3% from March to April, as economic restrictions continued to be relaxed.
  • Retail heavyweights Walmart, Target, and Home Depot will report earnings the week of May 17th and should provide further insight into consumer trends.
  • The FDA approved use of Pfizer’s vaccine for 12- to 15-year-olds. This could help to reopen schools that have not yet resumed in-person learning. That, in turn, could free up more parents to return to the workforce and fuel further economic recovery.
  • Separately, the CDC said fully vaccinated people don’t have to wear masks in most indoor and outdoor settings, though states and localities will still determine the actual regulations in force.
  • Drivers on the east coast experienced gasoline shortages after the Colonial Pipeline fell victim to a ransomware attack and had to be shut down for several days. While the episode appeared to have limited financial market impact, it was a reminder of how unforeseen events can spawn sudden economic uncertainty.
  • President Biden and bipartisan congressional leaders continued to discuss paths forward on a potential infrastructure bill. Much of the discussion revolves around how broad and costly the bill will be, and how it will be paid for, including through tax and fee increases. A successful bill could provide further impetus to economic growth in the years ahead, while also presenting potential tax implications for investors.

Final thoughts for investors

Markets are very sensitive to inflation data these days, and more data will be revealed in coming months. While speculation around future Federal Reserve action abounds, it’s important to stay focused on facts and prepare for a variety of future scenarios. Establish clear investing goals, understand your risk appetite, and speak with a financial professional about how to position your portfolio for different market conditions.

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