Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Market Performance Snapshot (Week ending February 5, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: +3.9% | +1.8%
- S&P 500® Index: +4.6% | +3.5%
- NASDAQ Composite® Index: +6.0% | +7.5%
- Russell 2000® Index: +7.7% | +13.1%
- 10-year U.S. Treasury note yield: 1.17%
- Up 9 basis points from 1.08% on January 29, 2021
- Up 25 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Energy, +8.3%
- Weakest-performing S&P 500 sector this week: Healthcare, +0.5%
Past performance is not a guarantee of future results.
Markets rise, while hoping for additional stimulus
Equity markets reached new highs during the week, as investors looked favorably on improving vaccine distribution and progress toward additional fiscal stimulus. Small-cap stocks continued to show the leadership they’ve exhibited over the past three months. The bond market followed equities’ lead, with the 10-year Treasury yield rising to 1.17% in anticipation of stronger economic growth.
- The latest jobs report revealed that 49,000 jobs were created in January. This was an improvement over December’s job losses, but well below the job gains seen earlier in the recovery. In an encouraging sign, weekly new unemployment claims fell to 779,000, the lowest number of claims since November. The figures suggest that the labor market may be through the worst of the economic effects of the latest virus surge, though faster job creation will likely depend on vaccine progress.
- Manufacturing in the U.S., Europe, and China continued to grow in January. The U.S. services sector also improved. However, the service sectors in the UK and Europe contracted during the month as the continent dealt with the ongoing winter virus surge and challenges with vaccine distribution.
- The number of people receiving a first COVID-19 vaccine shot has surpassed the number of confirmed COVID-19 cases, both in the U.S. and globally – a potentially hopeful milestone. However, new coronavirus variants continue to cause concern, and markets will be watching for signs that current vaccines can effectively combat new variants.
- Markets are looking to Washington for a new fiscal stimulus package. Democrats initiated the budget reconciliation process, which would allow simple majorities in both houses of Congress to pass most provisions of President Biden’s $1.9 trillion proposal.
- Simultaneously, with both sides expressing a desire to pass a bipartisan agreement, a group of 10 Republican senators offered a counterproposal of $618 billion, noting that the $900 billion authorized in December is still mostly unspent. Biden met with the Republican senators to discuss their proposal.
- At this point, it seems likely that a fiscal stimulus package will pass. The question is how much spending will be authorized, what provisions will be included, and how long provisions such as enhanced unemployment benefits will last.
Big tech earnings continue to impress
Quarterly earnings reports from big technology companies showed that the pandemic-induced shift toward online shopping and web-based activity remained strong in the most recent quarter.
- Amazon reported revenues of $125.5 billion, the first time it has surpassed $100 billion in quarterly revenue. The company also announced that founder Jeff Bezos will step down as CEO later this year, to be replaced by Andy Jassy, the head of Amazon’s cloud services business. Cloud services accounted for more than half of Amazon’s Q4 profit of $7.2 billion. Amazon shares rose about 4.5% for the week.
- Alphabet, Google’s parent company, topped expectations for both revenue and profit, as web advertising recovered after declines early in the pandemic. Operating income for the quarter was $15.7 billion, compared to$9.3 billion in Q4 2019. Alphabet stock rose about 8% after the report and 14.3% for the week.
- Peloton had a bumpy ride through the week. The company reported its first quarterly revenue of more than $1 billion, reflecting ongoing interest in home workouts as the pandemic continues to clamp down on gyms. The stock rose heading into the earnings report, but fell more than 8% after, as the company anticipated continued delays in fulfilling customer orders and planned more investments to reduce the backlog. For the week, Peloton stock was up about 1.5%.
- Supply chain issues are also causing a shortage of semiconductor chips, after demand for chips in laptop computers, cell phones, and cars surged in 2020. The shortage has caused major automakers to temporarily halt or slow production at plants around the world, including on lines making Ford’s profitable F-150 truck.
- Shares of GameStop and AMC Theatres tumbled amid continued volatility and heavy trading. Broader markets were less rattled by the activity than they were the previous week, as trading platforms and clearinghouses seemed to digest the trades smoothly. However, discussions continue about how – if at all – regulators should respond to the recent activity and the potential for similar episodes in the future.
Final thoughts for investors
Markets are cautiously optimistic about the prospects for the U.S. economy, while also seeking further confirmation of the economy’s direction. The ability of vaccines to defeat new virus variants, and of fiscal stimulus to carry the economy through the remaining stages of the pandemic, will be pivotal. We’re not out of the woods yet. Speak with a financial professional to ensure you’re prepared for various economic and market paths.