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.  

by William Henderson, Vice President / Head of Investments
Markets ended mixed last week with the broader markets closing higher and the technology-heavy NASDAQ closing lower on the week. For the week that ended May 7, 2021, the Dow Jones Industrial Average gained +2.7%, the S&P 500 Index rose by +1.2% and the NASDAQ fell by –1.5%. On the heels of a weak jobs report and resultant flight to quality, the 10-year U.S. Treasury Bond fell by six basis points to close the week at 1.58%. Value stocks, led by energy, materials and financials proved to be the best performing sectors, while growth stocks and utilities underperformed. While the NASDAQ struggled, we saw record levels hit on the Dow and the S&P. Year-to-date, the Dow Jones Industrial Average has returned +14.3%, the S&P 500 Index +13.3% and the NASDAQ +6.9%. 

As mentioned, the latest U.S. jobs figure, released last week, reported just +266,000 new jobs created in April 2021 vs. Wall Street Economists’ estimate of +1,000,000. In the annals of forecasting this was a huge miss, and a lot of uncertainty remains around the weak job numbers. Certainly, forecasting in the age of the COVID-19 Pandemic, is not a simple predictable science. Shortages of microprocessors and lumber could explain some of the job losses as they likely caused cancelled or delayed business production. Further, the relative generosity of unemployment insurance benefits for low-wage workers could be discouraging the jobless from accepting certain offers. Uncertainty in jobs reports will likely continue as a combination of varied openings of state economies and slowing vaccine distribution weigh heavily on hiring by leisure-related industries. 

Despite the weak job market, investors overall were pleased because the weakness further supports the Federal Reserve’s stance on interest rates, essentially assuring rates remain low for longer, which is generally good news for equities. Federal Reserve Chairman, Jay Powell, remains committed to seeing average inflation of 2% before raising interest rates. We are certainly seeing signs of inflation especially in certain building related commodities. Copper, lumber, and iron ore all hit new all-time highs last week; and Brent Crude Oil ended the week 2% higher, putting the price of a barrel of oil at just under $70.The chart below from the Federal Reserve Bank of St. Louis, shows the breakeven inflation rate derived from the yield on the 10-year U.S. Treasury and the level at which market participants “expect” inflation to be over the next 10 years. Higher or increasing spreads, as is evident in the chart, represents higher inflation expectations.    

Unsteady job reports, inflation concerns, and lingering pandemic worries weigh heavily on the markets, but the Fed remains committed to a strong recovery. We are certainly seeing healthy data from corporate America. So far, according to Goldman Sachs, 68% of first quarter results of S&P 500 companies reported earnings that beat expectations. While this is strong performance, the markets are more focused on future guidance and that is where uncertainty continues. Travel and leisure services are gaining strength and opening at faster rates than expected. To that end, the consumer remains poised to contribute to the economic recovery in a big way. Cash on hand and savings accounts remain at record high levels. Shown again in the graph below from the Federal Bank of St. Louis on M2 – Money Stock (sum of bank deposits and retail money market funds).