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

Market Performance Snapshot (Week ending August 6, 2021 and Year-to-Date)

  • Dow Jones Industrial Average®: +0.8% | +15.1%
  • S&P 500® Index: +0.9% | +18.1%
  • NASDAQ Composite® Index: +1.1% | +15.1%
  • Russell 2000® Index: +1.0% | +13.8%
  • 10-year U.S. Treasury note yield: 1.30%
    • Up 7 basis points from 1.23% on July 30, 2021
    • Up 38 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Financials, +3.6%
  • Weakest-performing S&P 500 sector this week: Consumer Staples, -0.6%

Past performance is not a guarantee of future results.

Equities rise after stronger-than-expected monthly jobs report

The S&P 500 and Dow Jones Industrial Average closed the week at record highs after the Department of Labor reported a gain of 943,000 jobs in July, above expectations of 845,000. Strong corporate earnings also eclipsed fears about the Delta variant’s impact on the economy. The 10-year Treasury yield fell as low as 1.13% early in the week before rebounding to close just above 1.30% as the jobs report eased economic growth concerns. Rising yields helped push financial stocks higher.

  • July’s monthly payroll report was solid across the board. The unemployment rate dropped to 5.4% from 5.9% in June, and wages increased 4% over the past year, a sign that inflation may be creeping into the labor market as employers seek to entice workers. The leisure and hospitality sector alone added 380,000 jobs in July. Total May and June employment figures were also revised upward.
  • Despite recent employment gains, the U.S. economy is still about 5.7 million jobs shy of pre-pandemic levels — a gap that will play into the Federal Reserve’s thinking about when to begin tapering monetary support.
  • In addition to the monthly jobs report, weekly new unemployment claims dipped to 385,000. Notably, the number of people receiving continuing unemployment benefits – an indicator of longer-term unemployment – fell below the 3 million level for the first time since March 2020. Taken together, the jobs reports indicate the labor market continues to recover, though at an uneven pace.
  • July’s Purchasing Managers Index (PMI) for manufacturers dipped slightly to 59.5 in July from 60.6 in June, while the services sector PMI hit a record 64.1 in July, up from 60.1 in June. A reading above 50 indicates expansion, so both sectors are growing, though spending may be shifting from goods to services as people continue resuming normal activities.
  • Whether that shift continues could depend on the Delta variant. Markets have mostly taken Delta in stride, expecting to avoid the lockdowns that shook the economy last year. However, many companies have adjusted their return-to-office plans and some localities have reimposed mask mandates or added vaccine requirements for public activities, injecting a dose of uncertainty into economic forecasts.
  • Moderna reported strong earnings on the back of vaccine sales, sending the stock up 17% for the week. The company also reported encouraging data on the effectiveness of vaccine booster shots, though the World Health Organization requested that wealthy countries hold off administering boosters until vaccines are more widely available throughout the world.
  • GM reported strong quarterly results and forecast full-year earnings at record levels. However, the full-year forecast was below market expectations, as rising materials costs and chip shortages continue to challenge automakers. The stock fell 9% before recovering somewhat later in the week. GM is up 32% year-to-date.
  • While corporate earnings have been strong, questions about the future abound for companies, including the impact of rising prices, difficulty finding enough workers, and lingering global supply chain challenges. High valuations and substantial uncertainty typically generate volatility in markets.
  • International growth trends are also in the spotlight, particularly regarding China. The country’s manufacturing PMI fell to its lowest level since April 2020, as price pressures crimped demand for goods. The Delta variant also poses challenges, prompting authorities in Beijing to cancel all large public events for the remainder of August. Year-to-date through July 31, Chinese markets underperformed the broader emerging markets universe by 12.5%.

Debt limit questions could unsettle markets

The federal government’s debt limit, which had been suspended for two years, went back into effect August 1. Until Congress votes to raise or suspend the limit again, the federal government can only issue new debt to rollover older debt. The Treasury Department is now carefully managing cash, receipts, and disbursements to ensure payments of the government’s obligations, expecting to be able to do so into the fall if necessary.

  • Over the past ten years, debt limit deadlines have become political footballs. The necessity of responding to the pandemic may dampen some of the clamor this time, but with federal debt at an all-time high some policymakers may focus on spending restraint. Previous debt limit quarrels have been resolved before the government defaulted on its obligations, but those episodes generated market tremors and may do so again.
  • Heading into the weekend, the Senate was aiming to approve its $1 trillion infrastructure package with $550 billion in new spending over eight years. The spending could give a lift to the industrials, materials, and transportation sectors. The bill will next move to the House, where difficulties wrangling a bipartisan coalition could add some uncertainty to the bill’s prospects.

Final thoughts for investors

The U.S. economy is poised for continued growth, though at a more moderate pace than earlier in the recovery. The Delta variant remains a big question mark potentially affecting labor markets, supply chains, corporate earnings forecasts, and global economic growth. With uncertainty high, speak with a financial professional about staying on track toward your long-term goals.

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