Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending November 19, 2021/Year-to-Date)
- Dow Jones Industrial Average®: -1.4% | +16.3%
- S&P 500® Index: +0.3% | +25.1%
- NASDAQ Composite® Index: +1.2% | +24.6%
- Russell 2000® Index: -2.8% | +18.6%
- 10-year U.S. Treasury note yield: 1.54%
- Down 3 basis points from 1.57% on November 12, 2021
- Up 62 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Consumer Discretionary, +3.8%
- Weakest-performing S&P 500 sector this week: Energy, -5.2%
*Past performance is not a guarantee of future results.
Despite strong retail earnings, stocks struggle for momentum
Positive retail sales and earnings data lifted major equity indices early in the week, but momentum slowed as concerns about inflation, COVID, and global growth re-emerged. Major indices finished mixed for the week, with the Dow Jones Industrial Average in negative territory while the S&P 500 Index managed a gain. The NASDAQ Composite closed above 16,000 for the first time as investors moved back into big tech names. The 10-year yield dipped as investors sought safety in Treasuries.
- October’s U.S. retail sales came in above expectations, rising 1.7% versus the consensus estimate of 1.5% and September’s 0.8%, indicating consumers are continuing to spend even as inflation pushes prices higher. The October uptick is a positive early indicator for Q4 GDP.
- Major retailers reported robust quarterly earnings, with Walmart, Target, Home Depot, Lowe’s, Macy’s, Kohl’s, and TJX (parent of TJ Maxx and other off-price retailers) all beating estimates for revenue and earnings. Most retailers also reported well-stocked shelves heading into the busy holiday shopping season.
- Macy’s and Kohl’s rose as investors welcomed good news for the beleaguered department store sector. Home Depot and Lowe’s also climbed as investors expected home improvement trends to remain strong. Walmart and Target fell on investor concern that margins will slip as the companies try to keep prices low to insulate consumers from inflationary pressures.
- Strong retail earnings confirmed the recent big-company trend – of the 95% of S&P 500 companies that have reported quarterly results, more than 80% have exceeded revenue and profit expectations. The earnings reports have helped propel the S&P 500 to all-time highs.
- Small businesses are somewhat less sanguine about the business outlook amid rising prices, tight labor markets, and shipping backlogs. In the National Federation of Independent Business’s monthly survey, the gauge of small business owners expecting better business conditions over the next six months was a net negative 37%, the lowest level since 2012. Supply chain disruptions are a concern, with 39% of owners saying they’ve had a significant impact on business and 29% reporting a moderate impact. 44% of owners have raised employee wages, a record high in the survey’s 48 years.
- Weekly first-time unemployment claims held roughly steady at 268,000, still above the pre-pandemic average, but below 300,000 for the sixth week in a row. Continuing claims fell by 129,000 to 2.08 million, although the pre-pandemic average was about 1.7 million.
- October housing starts slipped to 1.52 million versus the 1.58 million expected and September’s downwardly revised 1.53 million. Supply chain and labor issues are weighing on construction, however building permits rose in October which could mean more building in coming months.
- Industrial production – which includes activity in manufacturing, mining, and utilities – rose 1.6% in October, well above the 0.8% expected and September’s 1.3% decline. The Federal Reserve attributed about half the October gain to recovery from Hurricane Ida. Capacity utilization increased to 76.4%, above expectations but still below the long-run average.
- Concerns about another wave of COVID cases in Europe weighed on equities later in the week and pushed down government bond yields (which move inversely to prices). The potential for restrictions on travel and other activity, as well as new forecasts for better supply-demand balance in oil markets, led to a decline in benchmark crude prices.
- The FDA and CDC approved booster shots of Pfizer’s and Moderna’s COVID vaccines for all U.S. adults.
Congress will have a full plate after Thanksgiving
After months of intra-party negotiations, Democrats in the U.S. House passed a roughly $1.8 trillion social spending and climate investment bill. The package supports a range of education, healthcare, and childcare initiatives and includes tax credits for electric vehicle purchases and clean energy as well as tax increases on businesses and high earners.
- The bill’s future is still far from certain. Changes are likely in the 50-50 Senate, where Democrats can’t afford to lose a single member’s vote and the legislation must meet certain budget reconciliation parameters. Democrats hope to pass a version of the bill by Christmas, but this may not be feasible.
- Treasury Sec. Janet Yellen said the federal government may hit its debt limit as soon as Dec. 15. Democrats continue to seek Republican assistance in passing a debt-limit increase while Republicans insist Democrats pass the increase as part of their budget reconciliation package. Government bond markets may become more volatile if another protracted fight looks likely.
- The continuing resolution funding the federal government is set to expire on December 3. Congress will most likely pass another continuing resolution to avoid a federal government shutdown.
Final thoughts for investors
Consumers continue to power the U.S. economy, even as inflation bites, but the future is uncertain. Global supply chains remain kinked and virus concerns are on the rise in Europe. Public policy risk is again a factor in the U.S. As we head into the final month of the year, consider speaking with a financial professional about staying on track toward your long-term goals.