Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot (Week ending June 11, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: -0.8% | +12.7%
- S&P 500® Index: +0.4% | +13.1%
- NASDAQ Composite® Index: +1.8% | +9.2%
- Russell 2000® Index: +2.2% | +18.3%
- 10-year U.S. Treasury note yield: 1.45%
- Down 10 basis points from 1.55% on June 4, 2021
- Up 53 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Real Estate, +1.9%
- Weakest-performing S&P 500 sector this week: Financials, -2.4%
Past performance is not a guarantee of future results.
Markets take another inflation report in stride
Equity markets were mixed for the week, as investors digested the latest inflation reading. The S&P 500 reached a new closing high, while the Dow fell. The NASDAQ Composite posted strong gains, as falling Treasury yields helped growth stocks.
- The Consumer Price Index (CPI) for May rose 5.0% year-over-year, the largest increase since 2008, and an acceleration from April’s 4.2% rate. However, the month-to-month rate of inflation decreased from 0.8% in April to 0.6% in May.
- Core CPI, which excludes volatile food and energy prices, rose 3.8% year-over-year – the largest increase since 1992. However, core CPI also declined on a month-to-month basis – rising at 0.7% in May after climbing 0.9% in April.
- On the heels of a 10% increase in April, prices for used cars and trucks rose 7.3% in May, accounting for one-third of the overall rate of inflation. Supply chain challenges, including the shortage of semiconductor chips, have tightened supplies of new and used autos in recent months.
- All in all, the CPI report confirmed that prices are rising, though the pace moderated slightly from April to May. This appeared to boost market confidence in the Federal Reserve’s assessment that higher inflation will be transitory and should settle down later this year.
- The 10-year Treasury yield fell to its lowest level in three months, ending the week at 1.45%. As we approach the end of the quarter, institutional and foreign buyers are likely increasing their purchases of U.S. bonds, which still carry a higher yield than most other sovereign debt. (Bond prices and yields have an inverse relationship, so when higher demand pushes bond prices up, yields decline.)
- It's worth noting that higher prices aren’t confined to the U.S. China reported its largest jump in producer prices since 2008, as the country’s producer price index rose 9.0% year-over-year in May after rising 6.8% in April. Higher prices for commodity inputs, including oil, iron, and other industrial metals, drove the increase.
- European Central Bank President Christine Lagarde noted that Eurozone inflation “is expected to rise further in the second half of the year, before declining as temporary factors fade out.” The ECB kept its stimulative policies in place.
- The Federal Reserve’s next meeting is June 15-16. Investors will be listening for indications of when the Fed might begin tapering asset purchases.
Data indicates continuing jobs recovery, while employers have difficulty finding workers
As markets refine outlooks for inflation and economic growth, the strength of the labor market will play a prominent role. New data points to improving employment conditions.
- There were 376,000 weekly first-time claims for jobless benefits. This figure has fallen for six consecutive weeks, though it remains elevated from pre-pandemic levels.
- The Department of Labor’s Job Openings and Labor Turnover report (known as JOLTS) revealed a record-high 9.3 million open jobs at the end of April, about 1 million more than the previous month. The restaurant and hotel industries led the way.
- In addition, a record 4 million people quit their jobs in April. A large number of voluntary job resignations is typically viewed as a positive economic indicator, as people are more likely to quit a job when they have high confidence of landing a better position.
- The JOLTS data offer further evidence that employers are having difficulty finding workers to meet rising demand. The need to fill open positions could push up wages, potentially increasing inflation pressures. Unfilled positions may also restrain economic activity and challenge supply chains, particularly in manufacturing.
- The employment picture will likely become clearer in autumn, when schools and offices reopen and enhanced unemployment benefits expire.
U.S.-China economic competition continues
The U.S. Senate passed the $250 billion U.S. Innovation and Competition Act, which would increase funding for scientific research and to shore up domestic supply chains, particularly for semiconductors. The vote was bipartisan, with more than two-thirds of senators approving the measure. A final bill still needs to be negotiated with the House, but passage appears likely, and the White House has signaled support.
- In addition to potentially benefiting technology, defense, and industrial companies, the U.S. Innovation and Competition Act is another marker in the ongoing economic competition between the U.S. and China. The bill is specifically designed to reduce U.S. dependence on Chinese supply chains, and would ban the TikTok app from U.S. government phones.
- So far, the Biden Administration has deviated little from the previous administration’s approach to economic relations with China. Two recent executive orders specifically target Chinese firms. One order raises to 59 the number of Chinese companies Americans are banned from investing in. The second order directs the Commerce Department to flag mobile apps that could send U.S. user data to companies closely tied to the military or intelligence services of “foreign adversaries,” a term that specifically includes China.
- Investors should watch the ongoing economic and geopolitical competition between the U.S. and China, as developments in the relationship between the world’s two largest economies could impact markets.
Final thoughts for investors
Markets appear to be in an upbeat mood of late, optimistic about economic growth and unperturbed by near-term inflation. But risks remain, including the possibility of geopolitical confrontations, virus resurgences, and persistently high inflation. Be clear on your risk tolerance and investing goals, and speak with a financial professional about planning for the uncertain road ahead.