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

Market Performance Snapshot* (Week ending November 12, 2021/Year-to-Date)

  • Dow Jones Industrial Average®:  -0.6% | +18.0%
  • S&P 500® Index:  -0.3% | +24.7%
  • NASDAQ Composite® Index:  -0.7% | +23.1%
  • Russell 2000® Index:  -1.0% | +22.1%
  • 10-year U.S. Treasury note yield:  1.57%
    - Up 12 basis points from 1.45% on November 5, 2021
    - Up 65 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Materials, +2.5%
  • Weakest-performing S&P 500 sector this week: Consumer Discretionary, -3.2%

    *Past performance is not a guarantee of future results.

Hottest inflation reading in decades cools stock rally

After a strong start to the week, equities turned negative in response to Wednesday’s higher than expected inflation reading. Major indices recovered some ground later in the week but still finished in the red. The 10-year yield climbed.

  • October’s Consumer Price Index (CPI) rose 6.2% year-over-year, the fastest annual gain in more than 30 years, outpacing the 5.9% economists had expected. Prices increased in many sectors, especially for gasoline and autos. Restaurant prices rose more than 5% over the past 12 months, a sign wage increases in the sector may be feeding into higher prices. Core CPI, with food and energy costs stripped out, rose 4.6% year-over-year, the highest level since 1991.
  • During October, the CPI rose 0.9%, more than double the rise in September and above the expected 0.6% gain, suggesting that inflationary pressures from supply chain bottlenecks and strong consumer demand are not yet receding. Companies have largely been able to pass along higher labor and input costs to customers.
  • Separately, the Producer Price Index (PPI), a measure of U.S. prices along the supply chain before reaching the consumer, rose 8.6% year-over-year, the highest rate in records dating to 2010. A similar measure in China rose 13.5%, as the country continued grappling with energy and raw material shortages. Rising producer prices in China may add to global inflationary pressures.
  • Debt markets pushed up government bond yields after the CPI report, with the 10-year Treasury yield rising 11 basis points on Wednesday. Short-term interest rates also rose as futures markets priced in a potential interest rate hike from the Federal Reserve as early as June and likely an additional hike later in 2022.
  • Fed leaders have indicated a desire to end asset purchases before raising interest rates. Markets will be assessing whether persistent inflation pressures could cause the Fed to accelerate the pace of tapering, currently expected to wind down by June 2022.
  • The NASDAQ Composite Index, which includes many interest-rate sensitive growth companies, slipped as bond yields rose, while financial stocks benefited from the yield increase. Strong earnings from the technology sector and a highly successful IPO of Rivian Automotive buoyed the NASDAQ late in the week.
  • Higher inflation expectations contributed to the University of Michigan’s Consumer Sentiment Index falling to 66.8 in November, a 10-year low and below the 72.5 expected.
  • A record 4.4 million people quit their jobs in September, according to the Labor Department’s Job Openings and Labor Turnover Survey. The survey also found 10.4 million open jobs at the end of September, down slightly from August but still well above the number of job seekers.
  • Initial jobless claims fell for the sixth straight week amid the tight labor market. At 267,000, weekly claims are nonetheless still about 50,000 above the pre-pandemic average.

Infrastructure bill gives materials and industrials sectors a boost

Passage of an infrastructure bill that will pump a total of $1 trillion into the economy lifted equity markets early in the week. The bill, which added $550 billion to previously planned spending, isn’t a pure stimulus measure, as much of the price tag will be offset with additional revenues. Longer term, the new investments could help to ease infrastructure problems exposed by the pandemic, and many sectors should benefit.

  • The infrastructure package will direct funding to roads, bridges, public transit, passenger rail, ports, airports, utilities, broadband, cybersecurity, electric vehicle charging stations, and more. The materials and industrials sectors, which include many companies poised to capture some of the added spending, gained on the week.
  • At the COP26 climate change summit in Scotland, the U.S. and China unexpectedly issued a joint declaration agreeing to cooperate on a variety of climate-related issues. There were few details, but the declaration, along with a planned virtual summit between the U.S. and Chinese presidents on November 15, could signal a ratcheting down of tension between the world’s two largest economies (and biggest greenhouse gas emitters).
  • GE, one of the original components of the Dow Jones Industrial Average (but which fell out of the index in 2018), announced plans to break into three companies: aviation, health care, and energy. The spinoffs are expected to be completed by 2024, at which time the aviation company will retain the GE name. Markets boosted GE stock after the announcement. Johnson & Johnson and Toshiba also announced plans to split into multiple companies.
  • Investors gave a warm welcome to electric vehicle maker Rivian, making its IPO the largest U.S. listing since 2014. As of Friday’s market close, Rivian, which just started delivering vehicles in September and has not yet earned a profit, had a higher market cap ($110 billion) than GM ($92 billion) and Ford ($78 billion), the latter of which owns a 12% stake in the EV maker. Rivian’s valuation comes just a few weeks after Tesla’s market cap surpassed $1 trillion.
  • Following through on a decision announced in September, the U.S. reopened to visitors from 33 mostly European countries who had been prohibited from entering the U.S. for the past 18 months due to COVID. Foreign visitors will have to show proof of vaccination and a negative COVID test.

Final thoughts for investors

Inflation remains elevated and concerns are growing, but markets haven’t hit the panic button yet. Broadly speaking, companies and consumers look healthy for now. Investors will be watching and listening for any adjustment to the Fed’s plans for tapering asset purchases and raising interest rates. With significant uncertainty ahead, speak with a financial professional about your long-term goals.

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