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Commentary provided by Mark Szycher, Vice President,  Investment Specialist, AIG Retirement Services

Market Performance Snapshot (Week ending July 30, 2021, Month of July and Year-to-Date) 

  • Dow Jones Industrial Average®:  -0.4% | +1.3% | +14.2%
  • S&P 500® Index:  -0.4% | +2.3% | +17.0%
  • NASDAQ Composite® Index:   -1.1% | +1.2% | +13.8%
  • Russell 2000® Index:  +0.8% | -3.6% | +12.7%
  • 10-year U.S. Treasury note yield: 1.23%
    - Down 5 basis points from 1.28% on July 23, 2021
    - Down 24 basis points from 1.47% on June 30, 2021
    - Up 31 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Materials, +2.8%
  • Weakest-performing S&P 500 sector this week: Consumer Discretionary, -2.6%
  • Three best-performing S&P 500 sectors in July 2021:
    - Real Estate, +3.7%
    - Utilities, +3.0%
    - Health Care, +2.9%
  • Three weakest-performing S&P 500 sectors in July 2021:
    - Energy, -9.8%
    - Financials, -1.2%
    - Consumer Discretionary, -1.0%

    Past performance is not a guarantee of future results.

Equities dip as strong earnings continue, but GDP misses expectations 

Major indices declined for the week as investors digested strong tech earnings and solid, albeit weaker than expected, second-quarter U.S. economic growth. The Dow Jones Industrial Average, S&P 500, and NASDAQ Composite all rose in July – the sixth consecutive monthly gain for the S&P 500. The small-cap Russell 2000 bucked the trend, rising for the week but falling for the month. The 10-year Treasury yield ended the week at 1.23%, falling 24 basis points during July.

  • The first reading on second-quarter U.S. GDP growth was 6.5%, driven by consumer spending and government stimulus. While below expectations, 6.5% is high by historical standards and built on the first quarter’s 6.3% growth. The U.S. economy is now larger than it was pre-pandemic.
  • Many observers believe growth likely peaked in the second quarter, expecting the U.S. economy to grow at a slower pace in the second half of the year. While stimulus payments are waning and enhanced unemployment benefits are scheduled to end nationwide in September, consumers are likely to remain strong contributors to growth thanks to rising wages and, according to some market strategists, upwards of $2 trillion in “surplus savings” that wasn’t spent during the pandemic. As consumers shift spending from goods back to services –such as restaurants and travel – different sectors may benefit. One potential drawback: Rising inflation across spending categories could crimp demand.
  • Strong quarterly earnings continued apace as major technology firms reported big gains.
    - Alphabet, Google’s parent company, reported a 62% surge in revenue and doubled its quarterly profit as ad spending rose.
    - Microsoft reported its highest-ever quarterly revenue and far exceeded earnings expectations.
    - Apple reported continued revenue growth from strong iPhone sales.
    - Amazon posted growing revenue and profit, but fell short of revenue expectations.
    - While Google posted a weekly gain, the other three companies saw their share prices decline for the week, as valuations are high and it’s unclear whether the firms can continue growing at the torrid pace of the past year.
  • Boeing reported its first quarterly profit since 2019, helped by rising aircraft deliveries as airlines prepare for a surge in post-pandemic travel. Boeing’s European competitor, Airbus, reported strong first-half results and raised its forecast for aircraft deliveries and income. Both companies’ stock prices rose following the reports.
  • A big question hovering over the economy and markets is the Delta variant. After experiencing a Delta dip earlier in July, markets stayed steady as the CDC recommended that fully vaccinated people resume wearing masks in areas with high virus transmission rates. Investors may be banking on the economy having developed some resiliency to the virus – as Fed Chair Jerome Powell said of the virus on Wednesday, “We’ve kind of learned to live with it.”
  • The Delta surge may delay returns to offices and schools in the weeks ahead, which could affect the economy. On Thursday, the Labor Department reported 400,000 new claims for unemployment benefits, a drop from the prior week, but the second week in a row at or above 400,000, after falling as low as 368,000 earlier in July. The monthly jobs report on August 6 will provide the next broad snapshot of labor market conditions.

Fed holds steady while the Senate moves ahead on infrastructure

At its policy meeting on July 27-28, the Federal Reserve held its benchmark interest rate in the 0-0.25% range and declined to set a timeline for tapering asset purchases. Separately, the U.S. Senate agreed to open debate on a bipartisan infrastructure package that could provide more stimulus to the economy.

  • Following the Fed’s meeting, Chairman Powell said that while the economy has made progress, it has not yet achieved the “substantial further progress” necessary for the Fed to begin adjusting its accommodative policy stance. Markets are expecting the first interest rate hike no later than the first half of 2023.
  • Powell again stated that markets would be given plenty of notice before the Fed starts tapering asset purchases, with Treasury and mortgage bond purchases tapered at the same time. Some have called for the Fed to start tapering mortgage bond purchases first, given that historically low mortgage interest rates may have helped to drive home prices to all-time highs. However, Powell asserted that the Fed’s bond purchases have little direct effect on home prices.
  • On Friday, the Fed’s preferred measure of inflation – the core Personal Consumption Expenditures (PCE) price index – showed a 3.5% year-over-year increase and 0.4% monthly rise in June. The yearly jump was the largest since 1991, and well above the Fed’s 2% target.
  • The Senate voted 67-32 to open debate on a bipartisan infrastructure bill. The legislation would provide $550 billion in new spending on physical infrastructure. While the vote was procedurally important, the road to final passage in both houses could take weeks and is not guaranteed. Questions also remain about the prospects for a separate $3.5 trillion spending bill that Democrats are attempting to pass without Republican support.

China continues to rein in its tech companies

The Chinese government further stiffened regulation of technology companies, sending Chinese tech shares down sharply.

  • The most recent spate of regulatory action included directives related to online educational services, music licensing rights, and guidelines on food delivery drivers. These follow other orders related to data security and financial stability.
  • Major Chinese technology names including Tencent and Alibaba suffered declines. After months of increasing regulatory activity, Hong Kong’s Hang Seng Tech Index is down more than 30% from its highs earlier this year. By comparison, the S&P 500 Technology sector is up more than 17% year-to-date.
  • The moves are a reminder that it’s important to keep an eye on geopolitical risk factors.

Final thoughts for investors

The latest GDP report confirms the U.S. economy performed well through the first half of 2021, and a strong earnings season continues to lift markets. Yet questions remain as we move forward, including the future rate of growth, inflation’s effect on consumers and businesses, the economy’s ability to adapt to virus surges, and the timing and structure of fiscal and monetary policy changes. Speak with a financial professional about preparing for a variety of risks to stay on track toward your long-term goals.

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