The markets pulled back during a volatile week as inflation concerns sparked a sell-off in high-growth and technology stocks.
For the week, the S&P 500 and DJIA returned -1.35% and -1.08%, respectively. The tech-heavy NASDAQ closed down 2.32%. International markets didn’t fare any better with the MSCI EAFE declining 1.28% and MSCI EM off 2.99%. Fixed income was also under pressure as the Bloomberg Barclays U.S. Aggregate bond index finished down 0.37%. As a result, the 10yr U.S. Treasury yield rose 3bps to close at 1.63%. Gold inched higher by 0.37% to close at $1,838/oz. Oil (WTI) closed at $65.51/bbl – up 0.72% last week.
The catalyst for the pullback was a much hotter than expected April Consumer Price Index (CPI) reading that heightened inflation concerns last week. On Wednesday, the Dept. of Labor Statistics reported that the CPI increased 0.8% in April, well ahead of expectations of 0.2%. Year-over-year, the CPI has increased 4.2% which is the largest 12 month reading since September 2008. Looking at inflation from the producer side, the Producer Price Index (PPI) for April also doubled expectations with a reading of 0.6%. There are widespread supply shortages of materials including semi-conductor chips which are driving up production costs.
In other economic news, the JOLT’s report showed that 266,000 jobs were added last month and job openings hit a record 8.1 million at the end of March. Retail sales were virtually unchanged in April missing an estimate of 0.9% increase. Retail sales are still up 17.9% from February 2020, which marks the onset of the pandemic.
We are closely monitoring economic data around inflation. Inflation usually increases above trend at the beginning of an economic recovery. The Federal Reserve has indicated that this spike in inflation is transitory and will let it run above its 2% target for now before changing it’s accommodating policies. The concern is that the Federal Reserve will be forced to tighten monetary policy faster than markets are currently discounting. Rising prices and costs could also limit consumer demand and corporate profitability. Investors should continue to maintain risk exposure in-line with one’s long-term investment objectives and goals.
“If inflation were to move up in ways that are unwelcome, we have the tools for that, and we will use them. No one should doubt that. When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon” – Jerome Powell (March 20, 2021)
Equity markets mostly advanced last week which reflected a continued shift out of large cap growth companies who benefited from the Covid-19 response into economically sensitive areas that are more leveraged to an economic reopening. The best performing sectors last week and a year-to-date basis are energy, materials, financials and industrials.
For the week, the S&P 500 increased 1.26% while the DJIA jumped 2.72%. The tech-heavy NASDAQ declined 1.48%. International developed had a strong week with the MSCI EAFE up 2.63%. Emerging markets inched higher by 0.10%. Fixed Income, represented by the Bloomberg/Barclays Aggregate, finished higher last week as the index gained 0.28%. As a result, yields drifted lower last week with the 10yr U.S. Treasury closing at a yield 1.60% (down from 1.63% the week prior). Oil (WTI) prices jumped 2.03% last week to close at $64.82 per barrel. Gold prices closed at $1837/oz. – up 3.61% last week.
Earnings releases will continue this week, and we continue to expect companies to report mostly better-than-expected numbers. So far, 87.0% of companies have reported EPS ahead of consensus. Earnings are up 52.4% year over year vs. expectations for an overall 51.1% advance. S&P 500 revenues are up 14.3% vs. expectations of a 13.0% advance.
Economic data last week was mostly below Wall Street estimates. ISM manufacturing and services PMIs for April came in at 60.7% and 62.7%, respectively. Both releases were below expectations but still represent strong expansion in each sector. On Friday, it was reported that the U.S. economy gained 266,000 jobs in April, a significant miss against expectations of 1,000,000. Some businesses are cautious about ramping up hiring given the pandemic and uncertainty. Other industries are reporting they can’t find enough workers due to expanded unemployment benefits, workers fear of contracting the virus, and child-care constraints due to school closures.
Equity markets have been strong in 2021 and have correctly discounted the jump in corporate earnings. Many companies have issued strong guidance for the rest of the year but have seen a tepid market response. It would seem markets have discounted much of the good news and we wouldn’t be surprised if they take a breather here. Investors should maintain discipline in-line with their long-term goals.
“What would life be if we had no courage to attempt anything.” – Vincent Van Gogh
Markets were flat to slightly down last week despite strong earnings reports from Microsoft, Apple, Amazon, Alphabet (Google) and others.
For the week, the DJIA declined 0.50% while the S&P 500 was basically flat at +0.02%. The tech-heavy Nasdaq dropped 0.39%. International markets also moved slightly lower. For the week, the All Country World Index ex-USA declined 0.53% while emerging market equities (MSCI EM) finished lower by 0.40%. Small company stocks, represented by the Russell 2000, finished in the red by 0.24%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week lower as the index lost 0.18%. As a result, the 10 YR US Treasury closed at a yield of 1.63% (up ~6.6 bps from the previous week’s closing yield of ~1.57%). Gold prices closed at $1,767.30/oz – down 0.56% on the week. Oil prices jumped 2.3% on the week to close at $63.58 per barrel.
Earnings releases will continue in full swing this week, and we expect companies to report mostly better-than-expected earnings as covid cases recede around the world (with the exception of India and a few other countries). Massive amounts of economic stimulus along with accommodative central banks should support strong economic growth. According to S&P Capital IQ, Q1 S&P 500 earnings per share should rise 15.4% year-over-year.
Tepid market reaction to outstanding earnings reports from several bell weather companies tells investors that perhaps the markets have already discounted a lot of good news. Don’t be surprised if the markets take a bit of a breather here. We continue to suggest that investors stay close to their long-term target asset allocations with a slight defensive bias. Stay safe and enjoy the improving weather.
“Attitude is a little thing that makes a big difference” – Winston Churchill
ND&S Weekly Commentary (5.24.21) – Cryptocurrency vs. Kryptonite
May 24, 2021
It was a volatile week on Wall Street as investors struggled with rising inflation concerns and the Federal Reserve’s accommodating monetary policy.
For the week, the Dow Jones Industrial Average (DJIA) slid 0.5%, the S&P 500 lost 0.4%, and the Nasdaq rebounded 0.3% from four straight down weeks. Foreign markets were the bright spot with developed equities (MSCI EAFE) up 1.08% and emerging markets (MSCI EM) climbing 1.75%. Oil (WTI) prices took a breather down 2.3% for the week and are still up 32% year-to-date.
The corporate profit recovery has been strong with earnings rising 49% in the first quarter of the year. Earnings are expected to grow roughly 30% in 2021. The concern is that stock prices, as measured by the S&P 500, have risen 75% in the last 12 months of the pandemic recovery. The market is now selling at 22x forward price to earnings while the historical average is 16x.
On Wednesday, the Federal Reserve’s Open Market Committee (FOMC) disclosed that some members are preparing to talk about tapering asset purchases as a result of our rapid economic recovery. Lessening their purchases would place pressures on interest rates which could lower bond prices and raise concerns over slowing economic growth. Treasury yields initially rose after the FOMC meeting minutes were released but later subsided. Rates were virtually unchanged last week.
There was mixed economic data during the week. Jobless claims reached another pandemic low of 444,000; though small businesses are finding it difficult to find workers. The April housing market was weaker than expected with housing starts at 1,569k vs. 1,740k estimate. Existing home sales were 5.85m vs. the estimate of 6.07m. The Markit Manufacturing and Services indexes exceeded consensus.
The topic of the week was the 29% decline in the price of Bitcoin, the primary cryptocurrency and most speculative of assets. The People’s Bank of China banned financial and payment institutions from accepting digital currencies. Bitcoin’s price reached $64,829 on April 16th and hit $30,202 on Wednesday, sending jitters throughout the speculative areas of financial markets.
For now, we remain cautiously optimistic about equity markets, we would refrain from speculative investing and keep bond duration short.
“Bitcoin is really a fascinating example of how human beings create value, and is not always rational …” – Alan Greenspan