by William Henderson, Vice President / Head of Investments
Markets ended mixed last week with a reversal of the technology and value sectors for the first time in a while. The tech-heavy NASDAQ returned +0.3% for the week that ended May 21, 2021, while the Dow Jones Industrial Average lost –0.5% and the S&P 500 Index lost –0.4% over the same period. With the Fed on hold for interest rate movements and some weaker than expected employment and economic information, the bellwether 10-year U.S. Treasury Bond remained well below its 2021 high of 1.74% to close the week at 1.62%. Rising bond yields can be indicative of improving economic conditions. For the full year of 2021, returns on the stock market remain solidly positive. Year-to-date, the Dow Jones Industrial Average has returned +12.6%, the S&P 500 Index +11.3% and the NASDAQ +4.8%.

Inflation concerns have cast a pall on the markets over past weeks. One such area of noted inflation can certainly be seen in the housing market. Due to a significant jump in demand, home prices have skyrocketed in many regions of the country. Lower inventories and dramatically rising building-materials costs have impacted home prices. Higher lumber prices, for example, have had a substantial impact on new home construction prices. The chart below from Bloomberg, shows the gain in housing prices and lumber after the COVID-related recession.   

While the spike is reminiscent of the housing crisis of 2008-09 that led to the Great Financial Crisis, it is not likely to have a similar effect this time around. This time, we have falling unemployment rates, an increase in “work from home” demand, record low mortgage rates, and tight new housing construction trends. Conversely, the current housing climate gives the economy a sound foundation for a continued recovery.   

We cannot mention the word “spike” without a brief discussion of Bitcoin. Bitcoin and other cryptocurrencies have garnered plenty of attention during this market bull run, which is clearly indicative of two things: market liquidity and excess cash chasing investment opportunities. The chart below from Y-Charts, shows the run up in Bitcoin to near 60,000 (in U.S. dollars) and the recent near-50% sell-off. While drastic drops in asset prices are unsettling, Bitcoin is still a new asset class and small in terms of the overall market capitalization. However, volatility in esoteric areas of the market have, on occasion, roiled investors in a wider arena.   

This week we will see the final batch of 1st quarter earnings reports, with some major retailers and tech names reporting. Important names like Urban Outfitters, AutoZone, Dick’s Sporting Goods, Best Buy and Costco report and will give us a glimpse of the consumer’s move back to shopping whether online or in person. High-flying tech names like Snowflake, Salesforce, and Workday all report this week as well. The work from home trend has impacted these names and we will see if the recent push by corporate CEOs back to the workplace has a different impact. 

Nationally, we have witnessed a major victory over COVID-19 as we reached the critical 50% vaccination rate. Further, local economies are opening and lifting capacity restrictions on gatherings and restaurants. As we move into the summer, we will see the last area of the economy: travel and leisure surge with activity; limited only by constraints on labor. Our best friend remains Fed Chairman Jay Powell and his commitment to low interest rates for longer. 

by William Henderson, Vice President / Head of Investments
Last week, the markets moved lower from their previous record highs as investors reacted negatively to signs of higher inflation evident in the release of core inflation data. For the week that ended May 14, 2021, the Dow Jones Industrial Average returned -1.1%, the S&P 500 Index fell by -1.4% and the NASDAQ fell by -2.3%. U.S. Treasury bond yields rose as a result of the news. The 10-year U.S. Treasury Bond rose five basis points to close the week at 1.63%. Even considering last week’s losses in the markets, year-to-date returns remain positive. The Dow Jones Industrial Average has returned +13.1%, the S&P 500 Index +11.7% and the NASDAQ +4.5%.

As mentioned, the inflation data released last week cast a pall over the markets. Two generally accepted measures of inflation were released, and both saw substantial increases.  The April 2021, year-over-year change in CPI (Consumer Price Index) jumped +4.2% while PPI (Producer Price Index) popped +6.2%. CPI is the average change in prices consumer pay for all goods; PPI is the average change in prices received by domestic producers for their output. (See two charts below from Y-Charts). 

While this inflation data was much larger than economists predicted, it does not point to doom and gloom for the economy or the markets. Remember, the Fed (Federal Reserve Bank), is looking for inflation. Last week, Fed Vice Chair Richard Clarida acknowledged the surprise data by stating, “this data is entirely consistent with the Fed’s goals.” Additional comments from the Fed reminded investors that the economy remains far from the Fed’s employment goals. Recall, the Fed’s objective is to seek full employment and control inflation. For years, inflation has been running well below their stated objective of 2% per year and unemployment remains above 6%. So, the Fed has been clear about keeping interest rates lower for longer – at least until both inflation and employment are in check.  

Beyond inflation worries, investors were also forced to digest other unsettling events, including a hacker-induced shutdown of a major gasoline pipeline operated by Colonial Pipeline, the primary supplier of gas to the Southeast. Further, shortages in microchips have hampered car production in the U.S. which has oddly led to a rental car shortage. Lastly, and not unexpectedly, there was a sell-off in cryptocurrencies, specifically Bitcoin, as tech wizard Elon Musk announced that Tesla would no longer accept Bitcoin as payment for its cars because of the large carbon footprint that cryptocurrency mining leaves behind. 

There was plenty of good news last week as well. The CDC announced an easing of mask wearing requirements for fully vaccinated people and vaccine distribution for COVID-19 could begin for children aged 12-15. We have finally, hopefully, turned the corner on the pandemic and a grand reopening is upon us. A consumer flush with cash and willing Fed should provide the continued stimulus the economy and the markets need to move forward.