Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending August 13, 2021 and Year-to-Date)
- Dow Jones Industrial Average®: +0.9% | +16.1%
- S&P 500® Index: +0.7% | +19.0%
- NASDAQ Composite® Index: -0.1% | +15.0%
- Russell 2000® Index: -1.1% | +12.6%
- 10-year U.S. Treasury note yield: 1.29%
- Down 1 basis point from 1.30% on August 6, 2021
- Up 37 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Materials, +2.7%
- Weakest-performing S&P 500 sector this week: Energy, -0.8%
*Past performance is not a guarantee of future results.
Equities deliver mixed results amid inflation and consumer sentiment concerns
Major indices split for the week as inflation reports confirmed continuing price increases and the Senate passed an infrastructure bill that could deliver additional spending from Washington. The Dow Jones Industrial Average and S&P 500 set multiple records during the week, but the NASDAQ Composite and Russell 2000 ended in negative territory. After rising above 1.37% on Thursday, the 10-year Treasury yield fell to 1.29% following Friday’s report of a steep drop in consumer sentiment.
- July’s Consumer Price Index (CPI) registered a 5.4% year-over-year increase, unchanged from June. However, the month-over-month increase slowed to 0.5% in July from 0.9% in June as prices in certain categories, such as used cars, leveled off. Core CPI, which excludes volatile food and energy prices, rose 0.3% month-over-month, slightly below the forecast of 0.4%, and 4.3% year-over-year.
- The Producer Price Index (PPI), which measures prices along the supply chain before reaching consumers, rose 7.8% year-over-year in July, higher than June’s 7.3% increase. July’s monthly gain was 1.0%, higher than the expectation of 0.6%.
- Taken together, the inflation readings confirm significant price increases. Companies have also reported pricing pressures in their quarterly earnings reports and may respond by raising prices for consumers. Further, the monthly payroll report showed wages rising 4.0% year-over-year, which may be contributing to inflation.
- The latest weekly figure for new jobless claims was 375,000, in line with expectations. The reading has been below 400,000 for six of the past seven weeks. Longer-term unemployment also fell.
- The U.S. Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) reported a record 10.1 million unfilled jobs at the end of June, an increase of 590,000 from the previous month. For the first time since the pandemic started, the number of open jobs exceeded the number of people looking for work. Business services, retail, and leisure and hospitality reported the largest increases in unfilled positions. Private sector reports suggest job openings remained strong in July even as virus cases ticked up.
- With inflation lingering and the job market tightening, market participants continue to watch the Federal Reserve. Two regional Fed presidents said they favor tapering the Fed’s $120 billion a month in Treasury and mortgage bond purchases. Although the Fed’s policymaking committee won’t meet again until late September, the central bank’s annual economic policy symposium later this month in Jackson Hole, Wyoming, will be closely watched for insights into the Fed’s thinking.
- Markets remain relatively unfazed by the ongoing surge of virus cases. One exception may be the oil market, where benchmark prices have declined more than 7% this month. Southwest Airlines reported that bookings have ticked down and cancellations have risen amid travel concerns, and the International Energy Agency revised down its forecast for 2021 oil demand. However, the Biden Administration called on global oil producers to increase production to ensure economic recovery isn’t hampered by rising gasoline prices.
- The Delta variant may be weighing on consumers’ minds. The preliminary reading on the University of Michigan’s consumer sentiment index for August was 70.2, the lowest since 2011 and down sharply from 81.2 in July. The report sent Treasury yields lower. A second reading will be released later this month.
Senate passes infrastructure bill and budget
Markets reacted positively after the U.S. Senate passed a roughly $1 trillion infrastructure bill in a bipartisan vote, 69-30. The bill contains about $550 billion in new spending directed at transportation, broadband, utilities, and green energy, which should benefit companies in multiple sectors. The bill now heads to the House, where it may face resistance from various factions.
- Separately, Senate Democrats passed a $3.5 trillion budget outline that focuses on childcare, health care, education, and climate policy, and would likely raise taxes on higher earners, companies, and investors. The budget doesn’t allocate funding, but establishes parameters to guide committees writing spending and tax bills. If the House approves an identical budget, it would allow Democrats to pass a final package with a simple 50+1 majority in the Senate. Party leaders expect to have more detailed spending language in September.
- Notably, the Senate-approved budget did not include language raising or suspending the debt limit, and nearly every Senate Republican signed a letter indicating they will not vote to raise the limit while the Democrats’ $3.5 trillion budget is under consideration. As a result, debt limit wrangling could extend into the fall, making market disturbances more likely.
Final thoughts for investors
Inflation remains a top concern for companies and investors, as markets try to determine how price increases will affect the economy and the Fed’s decision-making. Other risks include the Delta variant and debt-limit politics. In a challenging market, it’s best to keep your long-term goals in sight and speak with a financial professional.