Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending October 8, 2021/Year-to-Date)
- Dow Jones Industrial Average®: +1.2% | +13.6%
- S&P 500® Index: +0.8% | +16.9%
- NASDAQ Composite® Index: +0.1% | +13.1%
- Russell 2000® Index: -0.4% | +13.1%
- 10-year U.S. Treasury note yield: 1.61%
- Up 15 basis points from 1.46% on October 1, 2021
- Up 69 basis points from 0.92% on December 31, 2020
- Best-performing S&P 500 sector this week: Energy, +5.0%
- Weakest-performing S&P 500 sector this week: Real Estate, -0.8%
*Past performance is not a guarantee of future results.
Equities climb after temporary debt-limit resolution
Major equity indices got off to a choppy start but found their footing to mostly finish the week in the green – only the small cap Russell 2000 Index dipped. Concerns about inflation, rising interest rates, and debt-limit brinksmanship initially weighed on stocks before giving way to optimism about a breakthrough on the debt impasse. A disappointing monthly jobs report tempered the enthusiasm on Friday. The 10-year Treasury yield crossed the psychologically important 1.5% barrier and kept climbing to close the week at 1.61%.
- The Department of Labor reported 194,000 jobs created in September, well below the consensus forecast of 500,000. Gains in August were revised up to 366,000 from 235,000.
- The unemployment rate dropped to 4.8% from 5.2%, though driven partly by 183,000 people leaving the workforce (individuals are only counted as unemployed if they are actively looking for work). Investors had been waiting to see how many people would be pulled back into the workforce by the expiration of enhanced unemployment benefits, but continuing virus challenges appear to be keeping significant numbers of people on the sidelines.
- Hourly earnings rose 0.6% versus an expected 0.4% – good news for workers and consumers, yet also stoking inflation fears as higher labor costs could entrench higher prices.
- The September payroll report was the last before the Fed meets November 2-3, when investors expect the Fed to establish a timeline for tapering asset purchases. Chairman Jerome Powell previously said he was looking for “a reasonably good employment report” to move forward on tapering. It’s unclear whether the September report meets that test or could spur the Fed to reassess its timetable.
- Weekly new unemployment claims dropped sharply to 326,000, below the 345,000 forecast, resuming the downward trend that prevailed earlier in September.
- Global oil and gas prices continued their advance amid supply challenges in Europe and Asia and rising global demand. Major oil producing nations, known as OPEC+, held firm in adding about 400,000 barrels per day of oil back to markets, declining to increase the pace as the Biden Administration and others had requested. U.S. benchmark crude prices reached their highest level in seven years.
- European natural gas prices remained near historic highs, helping to drive the Eurozone’s inflation rate to 3.4% in September, its highest level since 2008 – one factor feeding investor concern that persistent inflation may force central banks to reduce monetary support more quickly than anticipated.
- ISM’s gauge of U.S. service sector activity rose to 61.9 in September, the 16th consecutive month of growth and better than the anticipated drop to 59.9. Despite the strong number, ISM noted “ongoing challenges with labor resources, logistics, and materials.”
- The U.S. Commerce Department reported that factory orders increased 1.2% in August and revised July’s figure higher. However, factory shipments only gained 0.1% as supply chain kinks challenged everything from raw material flows to transportation logistics.
Debt-limit crisis averted for now
Senate agreement on a two-month increase in the debt limit relieved concern that the federal government was getting dangerously close to a potential default on its obligations. Senate Republicans had been insisting that Democrats approve a debt limit increase on their own through the reconciliation process. Treasury Secretary Janet Yellen had warned the U.S. could run out of cash on October 18.
- Assuming the House passes the Senate bill as expected on Tuesday, the debt limit will be raised by $480 billion, which should see the federal government through to December 3, when the continuing resolution funding the federal government expires. The stage will be set just after Thanksgiving for additional fiscal deadlines and potential market instability.
- Democrats continued attempts to work out intra-party differences to allow progress on the $550 billion infrastructure bill (passed by the Senate, awaiting action in the House) and the much larger education, health, and climate investment bill (not yet advanced in either chamber). News reports indicated the education, health, and climate bill may end up significantly smaller than the $3.5 trillion originally proposed, which could also mean smaller tax increases than were floated in the House.
- The Biden Administration announced it will keep Trump-era tariffs in place against China, while aiming to restart discussions between trade officials. President Biden also plans to meet Chinese President Xi Jinping in the coming months. There’s been little change in the trading relationship between the world’s largest economies since Biden came to office, however investors have focused more on Chinese regulatory moves in recent months.
- Pfizer requested FDA authorization for its vaccine to be distributed to 5-11 year-olds. If approved, and if uptake rates lead to reduced episodes of school closures and quarantines, more parents and caregivers may be drawn back into the workforce.
Final thoughts for investors
Investors continue to focus on the economic fundamentals of inflation, interest rates, and growth, but virus news, political gamesmanship, and geopolitical flare-ups can unsettle markets at any time. As volatility continues, stay focused on long-term goals and stay in touch with a financial professional.