Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot (Week ending May 21, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: -0.5% | +11.8%
- S&P 500® Index: -0.4% | +10.6%
- NASDAQ Composite® Index: +0.3% | +4.5%
- Russell 2000® Index: -0.4% | +12.2%
- 10-year U.S. Treasury note yield: 1.62%
- Down 1 basis point from 1.63% on May 14, 2021
- Up 70 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Real Estate, +0.9%
- Weakest-performing S&P 500 sector this week: Energy, -2.8%
Past performance is not a guarantee of future results.
A turbulent week for equities and a possible hint from the Fed
Stocks endured another volatile week, with most major indices in negative territory as investors appeared to reduce their risk appetite across the board. It was the second straight weekly loss for the S&P 500 – the first time that’s happened since February. Only the NASDAQ Composite managed to eke out a gain for the week, snapping a four-week losing streak.
- While the market pullback started early in the week, additional uncertainty came Wednesday after the Federal Reserve released the minutes of April’s Federal Open Market Committee (FOMC) meeting. For the first time, Fed policymakers seemed to be laying the groundwork for a future reduction in asset purchases: “A number of [FOMC] participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
- Even as the meeting minutes were released, several Fed governors and bank presidents reiterated that easing monetary support will depend on economic conditions and an end to major virus concerns, and that the economy is not out of the woods yet.
- Treasury yields rose after the Fed minutes were released, though the 10-year yield did not break out of the 1.55% to 1.75% range in which it’s spent most of the past two months.
- The latest weekly report on new jobless claims reached another pandemic-era low of 444,000. Several states will soon end enhanced unemployment benefits, as small businesses report difficulty finding workers. The interplay between economic expansion, job growth, and upward wage pressure is feeding into the inflation discussion, which is underscoring market uncertainty.
Retailer earnings benefit from stimulus, as shopping trends continue to evolve
Major retailers reported strong earnings for the most recent quarter, helped by consumers spending stimulus checks and beginning to broaden their range of purchases as pandemic restrictions ease.
- Target saw comparable sales rise 23% in the quarter, while Walmart experienced 6% growth. Walmart also raised its profit forecast for the year and said it sees opportunity in pushing lower prices as consumers take more time to comparison shop as inflation takes hold and in-store shopping expands. Target shares rose 6% after the report; Walmart rose 2%.
- Both Target and Walmart reported that sales of nonfood items – from apparel to small appliances – grew more strongly than grocery sales, a reversal from last year when consumers were stockpiling essential goods.
- Online sales for both companies also grew, but at a slower pace than earlier in the pandemic. Target indicated strong demand for online purchases with parking lot pickup, which could be an enduring retail trend growing out of the pandemic – and one that favors retailers with robust online and physical presences.
- Home Depot and Lowe’s benefited from the continued interest in home improvement projects, as well as higher lumber prices. The companies’ sales grew 31% and 26%, respectively. Home Depot also noted that transactions of $1,000 or more grew by 50% over the prior year, presumably helped by stimulus checks. Both stocks fell during the week amid broader concerns about slowdowns in the housing market.
- TJX Companies, the parent of T.J. Maxx, Marshall’s, and HomeGoods, reported strong U.S. sales growth as more stores reopened. However, the company’s stock fell about 5% due to ongoing uncertainty over international sales, with stores in Europe and Canada still not fully open. The result highlights that the global economy continues to recover at different speeds across regions.
- The big question for retail stocks going forward is how consumer spending will hold up when stimulus checks and enhanced unemployment benefits run out. Walmart CEO Doug McMillon summed up the current situation: “In the U.S., customers clearly want to get out and shop…. Stimulus in the U.S. had an impact, and the second half has more uncertainty than a typical year. We anticipate continued pent-up demand throughout 2021.”
Ford announcements highlight supply chain challenges, energy transition, and infrastructure debate
Ford confirmed that several plants making popular truck and SUV models will be partially shut down through June because of ongoing chip shortages. However, Ford shares rose more than 12% on the week after the company announced an electric version of its F-150 pickup truck for the 2022 model year.
- President Biden toured the Michigan plant where the electric F-150 is being built and said, “The future of the auto industry is electric. There’s no turning back.” He also pitched his infrastructure proposal, which would include billions for building out electric charging stations across the country, and framed the issue as part of an ongoing U.S. competition with China.
- Discussions between the White House and Senate Republicans over the contours of an infrastructure deal are ongoing. House Republicans joined the fray with a $400 billion proposal more narrowly focused on road infrastructure. The president is reportedly aiming for an agreement by Memorial Day. Investors across industries will be eager for final details on both the spending and revenue sides of any agreement.
Final thoughts for investors
The S&P 500 has risen nearly 86% since its March 2020 pandemic low, yet over that span the index has fallen 5% or more six times. Volatility will test investors’ willingness to stay invested during the dips, but it’s important to avoid over-reacting to short-term fluctuations. Devising a plan that meets your objectives and risk tolerance is of the utmost importance, so speak with a financial professional about staying on track toward your long-term goals.