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

Market Performance Snapshot* (Week ending August 27, 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  +1.0% | +15.9%
  • S&P 500® Index:  +1.5% | +20.1%
  • NASDAQ Composite® Index:   +2.8% | +17.4%
  • Russell 2000® Index:  +5.1% | +15.3%
  • 10-year U.S. Treasury note yield: 1.31%
    - Up 5 basis points from 1.26% on August 20, 2021
    - Up 39 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Energy, +7.4%
  • Weakest-performing S&P 500 sector this week: Utilities, -2.1%

    *Past performance is not a guarantee of future results.

Equities rise on vaccine approval and Powell comments

Stocks rose out of the gate on Monday, as the FDA’s full approval of Pfizer’s vaccine lifted investor sentiment. The positive momentum continued through the week, with the S&P 500 reaching records on multiple occasions and the NASDAQ Composite closing above 15,000 for the first time. Fed Chair Jerome Powell cemented the rally on Friday when he indicated an interest rate hike is still a long way off. The 10-year Treasury yield rose to 1.31%.

  • FDA approval of Pfizer’s vaccine lifted markets on the expectation that vaccine hesitancy will diminish. The FDA’s action also paves the way for the FDA and CDC to formally recommend booster shots, a recommendation many observers believe will be made next month. Separately, Johnson & Johnson reported positive trial data on booster shot efficacy for its single-shot vaccine.
  • Second-quarter U.S. GDP growth was revised to 6.6%, an uptick from the initially reported 6.5%, though just short of the expected 6.7%. The number confirms the economy was growing robustly through June. Markets and the Fed are trying to determine how the economy has performed since then, as government stimulus faded and virus cases rose.
  • IHS Markit’s index of service-sector activity fell in August to its lowest level in eight months, while its factory-activity index fell to the lowest level in four months. Although the indices show continued growth in both sectors, the pace has fallen from earlier in the recovery. IHS Markit attributed the declines to slowing demand as consumers grew cautious about the Delta variant, as well as supply chain and labor challenges.
  • July’s core Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, rose 3.6% year-over-year – the fastest rate since 1991 – and 0.3% month-over-month. Both figures were in line with expectations. Personal income jumped an unexpectedly high 1.1% in July, though growth in consumer spending slowed to 0.3% from the prior month.
  • Weekly initial jobless claims were 353,000, near their recent pandemic-era low and roughly in line with expectations.
  • Democrats in the U.S. House of Representatives approved a $3.5 trillion budget blueprint, allowing tax and spending committees to flesh out the details, expected around mid-September. A group of nine centrist Democrats had temporarily delayed the budget vote as they sought a vote on the Senate-approved bipartisan infrastructure agreement. Speaker Pelosi signaled that a vote on the infrastructure bill should happen by the end of September.

Powell says tapering may happen this year, but an interest rate increase is not imminent

In widely anticipated remarks at the Federal Reserve’s annual Jackson Hole economic symposium (held virtually on Thursday and Friday), Fed Chair Jerome Powell tamped down inflation concerns and signaled the Fed will likely begin tapering asset purchases in coming months, but said an interest rate rise is further down the line. Equity markets reacted well to his comments.

  • Powell said of inflation, “The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy…. Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory and that, in any case, the Fed will keep inflation close to our 2% objective over time."
  • Powell also confirmed that “it could be appropriate to start reducing the pace of asset purchases this year,” though he didn’t outline a specific timeline.
  • He reiterated that while the time to taper is drawing near, an interest rate hike isn’t imminent: “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” He specifically noted that while the labor market has made progress, “we have much ground to cover to reach maximum employment.”
  • The August payroll report will be released the Friday before Labor Day, providing another snapshot of the health of the labor market, while inflation data will be released mid-month. Both reports will be watched closely by the Fed ahead of its September 21-22 policy meeting.

Final thoughts for investors

Economic data, virus news, and the Fed’s intentions are top of mind for markets, as they try to gauge the current and future strength of the economy. The indicators don’t all point in the same direction, so expect uncertainty and volatility to continue. Speak with a financial professional about staying focused on your long-term goals.

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