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

Market Performance Snapshot (Week ending May 28, 2021, Month of May 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®+0.9% | +1.9% | +12.8%
  • S&P 500® Index:  +1.2% | +0.5% | +11.9%
  • NASDAQ Composite® Index:  +2.1% | -1.5% | +6.7%
  • Russell 2000® Index:  +2.4% | +0.1% | +14.9%
  • 10-year U.S. Treasury note yield: 1.58%
    - Down 4 basis points from 1.62% on May 21, 2021
    - Down 5 basis points from 1.63% on April 30, 2021
    - Up 66 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Communications Services, +2.5%
  • Weakest-performing S&P 500 sector this week: Utilities, -1.6%
  • Best-performing S&P 500 sectors in May 2021:
    Materials, +5.0%
    Energy, +4.9%
    Financials, +4.7%
  • Weakest-performing S&P 500 sectors in May 2021:
    Consumer Discretionary, -3.9%
    Utilities, -2.8%
    Information Technology, -1.1%

    Past performance is not a guarantee of future results.

Equities end the month quietly, as the Fed foreshadows tapering asset purchases

Stock trading was fairly light heading into the holiday weekend, bringing a calm end to a month in which inflation concerns influenced markets. The major indices ended the week in positive territory. The Dow Jones Industrial Average and S&P 500—which notched record highs at the beginning of May—managed to hold on to monthly gains, as did the Russell 2000. It was the fourth straight positive month for the S&P 500 and the eighth straight positive month for the Russell 2000.

  • In May, investors continued to favor equities associated with economic reopening and recovery. Russell 1000® Value stocks rose 2.1% for the month, while Russell 1000® Growth stocks fell 1.5%. This extends a trend seen since the start of the year. The value index is up 17.4% year-to-date, while the growth index is up 6.0%.
  • In the last few months, large-cap stocks have narrowed the performance gap with small-cap stocks. The Russell 1000 Index (large-cap U.S. stocks) is up 9.5% over the past three months, while the Russell 2000 Index (small-cap U.S. stocks) is up 3.1%. However, year-to-date, the Russell 2000 (+14.9%) is still outpacing the Russell 1000 (+11.5%), thanks to early 2021 small-cap gains.
  • It should be noted that year-to-date returns across small-caps, large-caps, growth, and value stocks are all historically strong for a five-month period.
  • Federal Reserve officials provided additional indications about paring back monetary support for the economy. In a play on Chairman Jerome Powell’s statement earlier this year that the Fed wasn’t “even thinking about thinking about” raising rates, San Francisco Fed President Mary Daly said last week, “We’re talking about talking about tapering” the Fed’s $120 billion a month in bond purchases. And Vice Chairman Richard Clarida said the topic of tapering should be on the agenda in upcoming Fed meetings.
  • The Fed’s slow-walk approach to reducing monetary support appears to be keeping markets calm. The 10-year Treasury yield didn’t show much reaction to the latest Fed comments, ending the week and month about where it started. After rising quickly from around 1% to 1.75% in the first quarter of 2021, the 10-year yield has been range-bound between 1.55% and 1.70% since early April.
  • On Friday, April’s core personal consumption expenditures price index, which excludes food and energy costs and is the Fed’s preferred inflation gauge, came in higher than expected at 3.1% year-over-year. However, bond yields fell after the report, suggesting that markets accept the Fed’s assessment that inflation increases are likely transitory, and that they believe the Fed will maintain its commitment to allow inflation to run higher than 2% for some period of time.

Summer may bring conflicting economic data

With more states loosening economic restrictions as vaccine rates rise and infection rates fall, markets will be watching economic data releases for evidence that a sustainable recovery is taking hold—and to assess how quickly the Fed might act to reduce monetary stimulus. However, with different sectors and states getting back up to speed at different paces, it’s unlikely that the data will all point in the same direction. We could get conflicting signs through the summer.

  • The latest data on new jobless claims revealed 406,000 new claimants, a sharp decline from the previous week. The rolling four-week average (which smooths out data) fell below 500,000 for the first time since the beginning of the pandemic.
  • Markets will be watching the Department of Labor’s May employment report, being released on June 4, to see if hiring re-accelerated after April’s disappointing figure. The monthly employment reports have taken on added significance because the Fed has emphasized labor market recovery in its economic assessments.
  • The U.S. Commerce Department reported that consumer spending grew 0.5% in April, building on a 4.7% increase in March. Future reports on consumer spending and inflation will provide insight into how consumers adjust to potentially higher prices (even if only temporary) as stimulus checks run out. The high personal savings rate and suppressed demand since last year suggest that consumers may have the ability and desire to spend through the summer and fall to keep fueling economic growth.
  • With more school districts announcing a return to full-time, in-person classes in the fall, and employers making plans to welcome employees back to offices, it’s beginning to look like the economy could be functioning mostly normally beginning in September. Many market observers have pointed to autumn as the time when the Fed’s plans may come into sharper focus.

Policy action on supply chains and infrastructure may have market impacts

Two trends that gained prominence in the pandemic—global supply chain disruptions and higher government spending—have led to legislative proposals in Washington that may provide further fuel for economic recovery.

  • The United States Innovation and Competition Act, a bill advancing through Congress with bipartisan support, would provide $250 billion to advance scientific research and restore U.S. manufacturing capability and supply chains, particularly in critical areas such as semiconductor manufacturing. The U.S. accounts for just 12% of global semiconductor supply, and recent shortages have affected several industries—most prominently automaking.
  • Negotiations over an infrastructure bill continue as well. A group of Senate Republicans presented a $928 billion counterproposal to the White House, which had lowered its initial request from $2.3 trillion to $1.7 trillion. While the goal of reaching agreement by Memorial Day wasn’t met, both sides indicate progress.
  • President Biden unveiled his $6 trillion budget proposal for fiscal year 2022, which begins October 1. The budget incorporates previously announced plans for boosting spending on infrastructure and social services. The budget would also make Biden’s proposed capital gains tax increases—taking the highest rate from 23.8% to 43.4%—retroactive to April 2021. Keep in mind, the president’s budget is mainly a statement of the administration’s fiscal priorities. Final spending and tax decisions rest with Congress.
  • Additional federal spending could promote long-term investments that benefit multiple U.S. sectors, including manufacturing, materials, transportation, and technology. It remains to be seen how companies, investors, or consumers could be impacted by taxes or fees to pay for the new expenditures.

Final thoughts for investors

In times of economic transition, portfolio durability is key. Depending on your investment goals, this could include a mix of large- and small-cap equities, growth and value stocks, and fixed income. Consider how you will be protected if inflation rises or remains elevated for longer than expected. Speak with a financial professional about maintaining a portfolio that reflects your long-term goals.

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