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

Market Performance Snapshot* (Week ending August 20, 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  -1.1% | +14.8%
  • S&P 500® Index:  -0.6% | +18.3%
  • NASDAQ Composite® Index:   -0.7% | +14.2%
  • Russell 2000® Index:  -2.5% | +9.8%
  • 10-year U.S. Treasury note yield: 1.26%
    - Down 3 basis points from 1.29% on August 13, 2021
    - Up 34 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Utilities, +1.8%
  • Weakest-performing S&P 500 sector this week: Energy, -7.3%

    *Past performance is not a guarantee of future results.

Equities fall as Fed tapering comes into focus

On Monday, the S&P 500 reached a milestone by closing at 4,479.71, more than double its pandemic low of 2,237.40 on March 23, 2020 – the fastest doubling from a market bottom since World War II. But major indices turned negative following weaker than expected retail sales data and indications that the Fed may begin tapering asset purchases this fall. Global virus concerns also weighed on equities. Despite a Friday rally, all major indices ended the week in the red. The 10-year Treasury yield slipped 3 basis points.

  • On Wednesday, the Federal Reserve released its July meeting minutes, revealing that it may start tapering Treasury and mortgage bond purchases this fall or winter.
  • According to the minutes, “Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year.” Still, some officials signaled they preferred to wait until 2022, and there was no agreement on how quickly purchases should be tapered once the process begins.
  • Fed policymakers expressed concern that markets may view a reduction in asset purchases as a signal that the Fed would also raise the Fed Funds target rate, when in fact a decision on each of the two policy levers will be made independently. Observers still predict an increase in the Fed Funds rate – currently 0-0.25% – no earlier than late 2022 and more likely in 2023.
  • Most Fed officials were satisfied with the inflation outlook, predicting longer-term inflation will remain at or below the Fed’s 2% target once supply chain and demand challenges work themselves out.
  • However, officials would like to see further progress in the labor market prior to giving serious consideration to raising the Fed Funds target rate. According to the July meeting minutes, “Most [Federal Open Market Committee meeting] participants judged that the Committee’s standard of ‘substantial further progress’ toward the maximum-employment goal had not yet been met.”
    - The strong July payroll report (released after the Fed’s July meeting) and the upcoming August payroll report will likely influence the Fed’s analysis at its next meeting on September 21-22.
    - Weekly new unemployment claims fell to a pandemic-era low of 348,000. While the initial figure is typically revised as more data become available, there has been a clear downward trend over the past two months as the labor market heals.
  • The virus is a major variable in the Fed’s forecast. In remarks on Tuesday, Chairman Jerome Powell said, “The Covid pandemic is still casting a shadow on economic activity. It is still very much with us…. It’s not yet clear whether the Delta strain will have important effects on the economy; we’ll have to see about that.” Powell and others may shed more light on the Fed’s thinking at the Jackson Hole economic symposium August 26-28.
  • The Biden Administration announced that Americans who received the Pfizer or Moderna vaccines would be eligible for booster shots eight months after receiving their second dose, starting in late September. Health officials are waiting for more data before deciding on booster shots for recipients of the Johnson & Johnson vaccine.
  • While the Delta variant’s effect on the U.S. economy isn’t yet clear, its effects on the Asia-Pacific region may weigh on global growth. China reported slowing growth in retail sales and industrial output in July, while lockdowns elsewhere in the Pacific are limiting travel and economic activity.
  • China also used the recent turmoil in Afghanistan as an opportunity to make saber-rattling comments about the U.S. commitment to Taiwan – evidence that geopolitical tensions between the world’s two largest economies remain elevated.

Retail sales dip from recent highs, but retailers report strong earnings

U.S. Commerce Department data showed retail sales declined 1.1% in July from June, worse than the expected 0.3% decline. A decline in auto sales – where supply has been limited and prices have surged – weighed heavily on the overall figure. Sales of clothing and sporting goods also declined.

  • On the positive side, restaurant and bar sales were up 1.7% and overall sales in July were up more than 17% from February 2020, just before the pandemic took hold. June’s sales were also revised upward from a 0.6% to a 0.7% gain.
  • Some of the shift from spending on goods to spending on services such as entertainment and travel may not be captured in retail sales figures. With consumer spending accounting for about 70% of U.S. GDP, markets will continue to watch every barometer of consumer health.
  • A string of retailers – including Walmart, Target, Lowe’s, and Home Depot – reported above-expectations sales and profits for the quarter ending in July, though the torrid pace of growth in online sales during the pandemic may be leveling off. Walmart, Target, and Lowe’s projected strong sales for the rest of the year, while Home Depot declined to provide forward guidance.
  • As earnings season winds to a close, FactSet reports that 87% of S&P 500 companies have reported revenue above expectations – the highest percentage since FactSet began tracking the statistic in 2008.

Final thoughts for investors

Strong corporate earnings, reasonably good retail sales, and an improving labor market all provide tangible evidence of the economy’s strengths. However, major unknowns – including the economic effects of the virus and the timing of future Fed decisions – continue to inject uncertainty into market forecasts. Expect volatility to persist and speak with a financial professional about staying focused on your long-term goals.

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