Keeping focused on your long-term goals

Weekly Market Commentary | Week ending July 23, 2021


Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Market Performance Snapshot (Week ending July 23, 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  +1.1% | +14.6%
  • S&P 500® Index:  +2.0% | +17.5%
  • NASDAQ Composite® Index:  +2.8% | +15.1%
  • Russell 2000® Index: +2.1% | +11.9%
  • 10-year U.S. Treasury note yield: 1.28%
    - Down 2 basis points from 1.30% on July 16, 2021
    - Up 36 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Communication Services, +3.2%
  • Weakest-performing S&P 500 sector this week: Utilities, -0.9%

    Past performance is not a guarantee of future results.

Equities recover from an early-week decline driven by virus fears

Major indices fell sharply on Monday—the Dow Jones Industrial Average dropped more than 700 points—before recovering over the next several days. The Dow, S&P 500, and NASDAQ Composite all ended the week at record closing highs. Concerns about the Delta variant and its potential dampening impact on U.S. and international economic growth jolted investors, temporarily drawing attention from a steady stream of positive corporate earnings. The 10-year Treasury yield also dropped as low as 1.14% on Monday before reverting back toward 1.3% with market fears easing as the week progressed.

  • Virus concerns punctuated a broader conversation about where the U.S. economy is situated in the recovery cycle. Will the exceptional growth figures of the first and second quarters continue into the third, or will growth moderate as economic activity returns to a more typical state?
  • Of note, the small-cap Russell 2000 Index has declined 2.6% since the beginning of June while the broad-based S&P 500 is up 4.9%. Small-cap stocks tend to benefit early in the recovery cycle when growth surges, whereas large-cap stocks typically outpace small caps as the recovery matures and growth declines to a more sustainable level.
  • Thus far in the quarterly earnings season, companies across industries are reporting strong revenue and profits, particularly in comparison to last year’s depressed levels. However, the future path of earnings is cloudy, as uncertainty around economic growth and inflation complicate efforts to project future earnings. With inflation on the rise—at least temporarily—a major question is whether companies have pricing power to pass on higher input costs to consumers; if not, profit margins could be squeezed.
  • The latest report on new unemployment claims revealed an unexpected rise to 419,000, with much of the increase concentrated in Michigan and Kentucky, where automotive plants have been temporarily shuttered in response to semiconductor shortages and other supply chain challenges.

Policymakers signal commitment to continued stimulus and investment

As questions about inflation and the strength of the global economic recovery continue to percolate, expect policymakers to maintain stimulative policies until virus fears sufficiently abate to put economies on solid ground.

  • On Thursday, the European Central Bank (ECB) kept its benchmark interest rate at -0.5% and confirmed that it will continue purchasing assets until at least spring 2022. The ECB also reiterated its plan to allow inflation to rise above the ECB’s 2% target for some time before raising rates.
  • The Federal Reserve’s policy-making committee meets again on July 27-28 and is expected to discuss whether to begin tapering asset purchases, and, if so, when, how quickly, and which assets. Fed Chair Jerome Powell may—or may not—provide further guidance in his post-meeting press conference.
  • Policymakers at the Fed, ECB, and elsewhere expect elevated inflation rates to fall as transitory factors (such as supply chain challenges and a burst of consumer spending following lockdowns) ease. Movement on the 10-year Treasury yield suggests that markets agree with that assessment. With the 10-year yield below 1.3%, investors appear more concerned about the possibility of lower economic growth—either due to a maturing recovery or unpredictable factors like the virus—than inflation taking hold for an extended period.
  • Investors await further insight as to how Congress will move forward with infrastructure and human services spending. A vote to advance a bipartisan infrastructure plan failed on Wednesday, although it is expected to succeed next week after the two sides agree on additional details. Democrats are expected to move independently on a separate $3.5 trillion spending bill, which could have a stimulative effect as it flows to companies and consumers, though it may be accompanied by tax changes that could offset some of the impact.

Final thoughts for investors

The early-week equity selloff was a reminder that virus concerns remain a major source of uncertainty in markets, and a sudden burst of volatility can overwhelm positive news from corporate earnings or the economic recovery. Investors are evaluating the pace of economic growth and inflation moving forward, including how companies and consumers will respond to higher prices. In a highly uncertain time, it’s best to work with a financial professional to clearly articulate your long-term goals and develop a plan for achieving them.