Economic Update 8-23-2021
- Economic data for the week included weakness in retail sales, housing, as well as regional manufacturing sentiment. On the other hand, industrial production and jobless claims improved.
- Global equity markets suffered net declines last week, as the headwinds of the Covid delta variant, potentially peaking growth, and higher potential for a Federal Reserve ‘taper’, all weighed on investor sentiment. Bonds fared decently as flows moved away from risk assets, driving down rates. Commodities suffered sharp declines, as the above-noted factors were assumed to threaten economic activity and goods demand.
The surprise fall of the government in Afghanistan over the prior weekend contributed to some cautious sentiment, but was not as sharp as some feared. Aside from the humanitarian and geopolitical concerns, the Afghanistan is viewed as a large depository for rare earth minerals, which could potentially fall into Chinese hands. More immediately, it appeared to be coupled with fears over a peaking growth trajectory in the U.S., particularly with rising delta variant cases, despite record earnings reports continuing to come through for Q2. As noted earlier, the release of minutes from the July Fed meeting on Wed. confirmed some suspicions that the FOMC appears interested in a ‘taper’ beginning later this year (as opposed to the market ‘best case’ scenario of early 2022). Markets down a few percent don’t quite indicate another ‘tantrum’, but Fed language continues to be scrutinized for clues. In an immediate example, Friday saw a bounceback as soon as the President of the Dallas Fed publicly questioned pulling back on stimulus as Covid continued to rage on.
By U.S. sector last week, only defensive health care and utilities fared decently, up 2% each, while most cyclical sectors declined—led by energy down over -7%, in keeping with weaker oil prices. Real estate was also up slightly. In keeping with recent trends, small caps underperformed large caps, due to their embedded greater sensitivity to cyclical movements. The Russell 2000 actually moved into -10% correction territory briefly.
Foreign stocks experienced lower returns than domestic names, not helped by a sharply stronger U.S. dollar last week—Europe and Japan experienced similar results. Similar concerns over the intensifying delta variant appeared to weigh on sentiment, and its potential effects on recovery growth. Interestingly, in contrast to the U.S., U.K. inflation came in at a rate of only 2.1%, with that in the Eurozone up 2.5%. Emerging market stocks were down sharply across the board, from China and Brazil, to South Africa—all down 5-10%. Chinese stocks fared negatively early in the week, with fears of a more substantial growth slowdown, as well as additional regulation aimed at data privacy/usage by companies, as well as niche restrictions such as prohibition of fake product reviews (no doubt many in the U.S. would be in favor of similar rules involving the latter).
U.S. bonds gained as assets moved to ‘risk off’ during the week, driving interest rates lower at the longer end of the treasury curve. Treasuries outperformed both investment-grade and high yield bonds, as spreads widened. As the U.S. dollar strengthened by about a percent, foreign bonds declined sharply, led by weakness in emerging market local debt.
Commodities fell across the board last week, as fears of the delta variant affecting the global growth recovery pace weighed on pricing, as did a substantially stronger dollar. Aside from little change in precious metals, energy, industrial metals, and agriculture all declined upwards of -5%. The price of crude oil corrected sharply, by over -9% to just over $62/barrel—a three-month low.
|Period ending 8/20/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.16||-0.65|
|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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