Economic Update 5-17-2021
- Economic data for the week included a surprise higher for consumer inflation, with the strongest monthly report in decades, along with strong readings for producer price inflation and import prices. Industrial production also came in positively, while retail sales and consumer sentiment fell back a bit from a stronger prior months.
- Equity markets experienced higher volatility last week as early fears of inflation were eventually replaced by optimism over the CDC’s looser recommendations about mask-wearing. Bonds fell back as higher long-term rates again pulled prices lower. Commodities were mixed, with gains in energy and declines in industrial metals and agriculture.
A back-and-forth week for equities ended with net returns ending up negative. Wednesday saw markets down 2-3%, the worst single day in month, as the morning’s CPI report came in high, spooking some investors. The year-over year, as noted above, wasn’t that far from expectations. However, Thursday and Friday featured sharp rebounds, seemingly powered by new CDC guidelines allowing for masks to be put away for vaccinated individuals. Although not a tangible economic event, the surprise action seemed to improve the overall mood and potentially further accelerate reopening activity. A restart of the Colonial Pipeline helped as well, easing extreme gasoline supply pressures in the East and Southeast, with hopes of stronger government prioritization of cyber threats.
Sector results were led by financials and consumer staples outperforming with minor gains, while consumer discretionary stocks fell by nearly -4%. The latter was mostly due to a pullback in Tesla, now the second-largest member of the sector (behind Amazon), as it was announced that the firm would no longer accept Bitcoin for payment, despite earlier announced large corporate holdings in the currency. Technology and communications stocks each fell over a percent as well. Real estate also suffered negative returns, pressured by higher interest rates in the past week; this is despite a stronger long-term positive relationship between real property and inflation.
The performance differential between the S&P 500 and Nasdaq had become far more apparent in recent weeks, as the latter was down -2.5% early in the week as the more expensive tech names fell back. Over the past month, the Nasdaq ‘growth’ group is nearly in correction territory, with investor preferences moving to more cyclical ‘value’ names, particularly in financials and energy/materials, with post-Covid reopening themes continuing. Earnings estimates for 2021 continue to be revised upwards, which seems to be letting stocks ‘grow into’ their relatively multiples a bit—not an uncommon tendency in recoveries.
Foreign stocks were mixed compared to the U.S. last week, with minimal losses on net for Europe and the U.K., while Japan and the emerging markets each declined by several percent last week. A stronger British pound resulted from status quo election results, as well as better-than-expected economic growth being reported. Overall, continued pandemic concerns appear more pervasive abroad, with largely lower vaccination rates so far, and fears that higher U.S. inflation will carry globally.
U.S. bonds declined on the week as longer-term interest rates ticked higher upon investors’ broadening inflation fears after the week’s surprisingly strong CPI report. Floating rate bank loans fared better than traditional debt, benefitting from higher yields. Despite a little-changed U.S. dollar, developed market government bonds fell sharply as rates ticked higher overseas as well.
Commodities generally lost ground on net, with major declines in agriculture and a modest drop in industrial metals offsetting small gains in energy and precious metals. Corn and wheat contracts in particular fell sharply, as speculators pared back positions upon news of logistical issues in grain markets. The price of crude oil bounced around for several days before ending almost a percent higher, over $65/barrel. Over the prior weekend, the Colonial Pipeline, serving the east coast, suffered a ransomware attack, shutting down operations and requiring contingency plans for fuel delivery, but not enough to stem shortages. This may be used as additional reason to beef up America’s hard infrastructure, which has increasingly been seen as vulnerable to such attacks.
|Period ending 5/14/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.37||-2.70|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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