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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Market Performance Snapshot (Week ending June 18, 2021 and Year-to-Date) 

  • Dow Jones Industrial Average®:  -3.4% | +8.8%
  • S&P 500® Index:  -1.9% | +10.9%
  • NASDAQ Composite® Index:  -0.3% | +8.9%
  • Russell 2000® Index: -4.2% | +13.3%
  • 10-year U.S. Treasury note yield: 1.44%
    - Down 1 basis point from 1.45% on June 11, 2021
    - Up 52 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Information Technology, +0.1%
  • Weakest-performing S&P 500 sector this week: Materials, -6.3%

    Past performance is not a guarantee of future results.

Federal Reserve holds rates steady, but revises its timeline for future policy changes

Equity markets fell for the week after the Federal Reserve raised its inflation expectations and said interest rates may increase in 2023, rather than 2024. The Dow Jones Industrial Average suffered its worst week since October. The NASDAQ Composite closed at a record high on Monday but couldn’t hold onto a weekly gain, snapping a four-week winning streak. All S&P sectors were negative, with the exception of technology stocks, which eked out a gain of less than 1%. The 10-year Treasury yield briefly neared 1.6% before falling to end the week close to where it started.

  • At their latest meeting, Fed policymakers left interest rates and asset purchases unchanged. However, the Fed raised its projection for full-year 2021 inflation to 3.4% from the 2.4% it projected back in March, and also increased its forecast for U.S. GDP growth this year to 7.0% from 6.5%.
  • In addition, a majority of Fed policymakers said they expect an interest rate increase in 2023, a shift from earlier meetings when most expected rates to increase in 2024. Seven of 18 Fed policymakers said an increase may occur in 2022, while none believes an increase will be coming in 2021.
  • In his press conference following the meeting, Fed Chair Jerome Powell acknowledged that “inflation could turn out to be higher and more persistent than we anticipate,” but he continued to assert that inflation increases should be temporary and settle down as supply and demand rebalance in coming months. He added that if inflation does prove more persistent than expected, the Fed will take action to maintain price stability.
  • While noting that the economy has still not achieved “substantial progress” toward the Fed’s recovery goals, Powell said it will likely reach those goals “somewhat sooner than anticipated.”
  • The Fed also decided to maintain asset purchases at their current level of $120 billion a month to help keep long-term interest rates low. However, Powell said policymakers had begun “talking about talking about tapering.”
  • The general message to markets was that the Fed is aware of increasing price pressures in the economy, but still hasn’t seen enough evidence of progress on economic recovery to warrant a reduction in monetary support. That said, the Fed has started signaling a reduction in asset purchases and increase in interest rates down the line. The Fed is taking a deliberate approach to policy changes, with the goal of not surprising or unsettling markets, or crimping the still-fragile post-pandemic recovery.

New economic data re-affirms the trend of rising inflation and uneven recovery

Data on producer prices, retail sales, and jobless benefits continued to paint a mixed picture of the economic recovery.

  • May’s Producer Price Index – a broad measure of the prices charged by suppliers of goods and services – rose by 0.8% for the month and 6.6% year-over-year, the fastest annual increase since records started in 2010. Prices for metals and grains rose sharply, while fruit and chemical prices declined.
  • Retail sales fell 1.3% in May – an unexpected drop. However, April’s figure was revised upward to a 0.9% gain versus the initial flat reading, and March saw a double-digit gain. Taken together, the figures suggest that consumers are generally maintaining spending at higher levels as the economy continues to re-open. Total sales in May were 10.8% higher than in February.
  • Sales figures at clothing stores and restaurants increased in May, while building materials and gardening supplies dipped, perhaps reflecting higher prices. After surging for the past year through May, prices of lumber and other commodities have eased in recent weeks.
  • Also noteworthy: Oil prices have risen more than 12% in the past month. Further increases could translate into higher gasoline prices, dampening broader consumer spending and economic growth.
  • The latest weekly reading on first-time unemployment claims rose to 412,000, the first rise in seven weeks. However, the four-week moving average of new claims fell for the tenth straight week, dropping below 400,000 for the first time since the start of the pandemic.
  • Bottom line: Consumers continue to spend, though they may be somewhat pinched by high prices in certain parts of the economy. Employment figures will bear watching in coming weeks, particularly as enhanced jobless benefits end in more than 20 states.

Keep an eye on evolving fiscal policy and geopolitical decisions

While markets have recently been focused on monetary policy, fiscal policy – the spending and tax decisions made by Congress and the White House – may also influence the economy and markets in the months ahead.

  • Negotiations around an infrastructure bill continue, with bipartisan agreement still possible. While final details haven’t been established, increased infrastructure spending would provide additional fuel for economic growth and job creation, particularly in the industrials, materials, energy, and technology sectors. Additional government spending could also contribute to higher inflation.
  • President Biden’s meetings with European leaders and Russian President Vladimir Putin were a reminder that geopolitical tensions are likely to cause perturbations in the global economy and global markets. The U.S. and European allies sought more cooperative approaches to dealing with perceived economic competition and security threats from China and Russia. Measures and countermeasures taken by each side are worth watching, as they may affect various companies and sectors over time.

Final thoughts for investors

Market leadership has rotated several times this year, strongly favoring value and small-cap stocks during some periods, while at other times rewarding large-cap and growth stocks. Interest rates have largely fluctuated within a narrow range, whereas commodity prices have surged and receded.  Different sectors have leapt ahead and then fallen back. Market gyrations are a reminder that it’s important to have a diversified portfolio, consistent with your investment objectives and risk tolerance.  Don’t try to time the movements of market segments. Speak with a financial professional about building a portfolio for the long term.

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