Market Commentary for the week ending May 29th, 2021
- New home sales posted a surprising -6% decline as prices accelerate higher.
- Everything rallied led by riskier assets such as small stocks and emerging markets.
- Bond yields continued to retreat from March highs as inflation fears ease.
Travel-Related Stocks Surge
As more people get vaccinated and economies continue to reopen worldwide, travel and entertainment stocks are among the biggest market beneficiaries. This was certainly the case during the most recent week with many of these stocks posting outsized gains as illustrated in the accompanying table. Year-to-date many of these stocks are up 2 – 3 times the overall market’s gain.
Casino stocks, like cruise lines and airlines, collapsed during the COVID Crash last year falling -80% or more. This group has recovered all of those losses and continued to new all-time highs while the stocks of most cruise lines and airlines remain below pre-COVID prices.
This Week’s Performance Highlights
- Stock markets around the world nearly all closed higher for the week as investors were clearly interesting in embracing more risk and betting the economy continues to reopen and growth accelerates.
- At the close of the week, large U.S. stocks, as measured by the S&P 500, gained +1.2% as the Dow Industrials lagged up +0.9% and the tech-heavy NASDAQ outperformed rallying +2.1%. Although the NASDAQ has regained some strength in recent weeks it continues to trail the S&P 500 year-to-date with a gain of just 6.7%.
- Small U.S. stocks, in a sign of investors willingness to take on more risk, outperformed large stocks this week gaining +2.5%. For 2021 this group is up +15.2% compared to large stocks’ gain of +12.7%.
- Utilities, considered one of the safest sectors, was the worst performer this week down -1.5% in what was another sign of investors higher tolerance for risk. The consumer discretionary sector, including travel-related stocks, was the best performer gaining +2.6%.
- International stocks rallied along with U.S. markets with developed country stocks up +1.0% for the week. Emerging markets did much better jumping +3.3% helped by sizable gains in both China and Hong Kong up +2.4% and +3.1% respectively.
- All of the less traditional asset classes were higher as well with Commodities performing the best gaining +2.6%. Real estate was a close second higher by +2.1% and gold’s price rose by -1.3%.
- Bond prices moved higher by +0.2% for the week leaving the yields on the benchmark 10-Year U.S. Treasury at 1.584%. This yield traded well above 1.7% in March and April on fears of inflation but, for the time being, these fears seemed to have eased.
New Home Sales came in at an annualized rate of 863,000 down -6% from the prior month and well below economists’ estimate of 959,000. Three of the 4 regions experienced declines with the biggest drop in the Northeast down -14% while sales in the West climbed +3.9%. The disappointing overall number is being blamed on rising home prices making them less affordable to some buyers. In addition, builders may be hesitant to sell homes they have not yet broken ground on out of fear that material costs may rise and reduce their profit margins. As illustrated in our blog last month, sales remain well above year-ago levels.
According to the CoreLogic Case-Shiller National Home Price Index, home prices rose in all 20 of the cities included in the index with the average nationwide up +13.3% during the past year. Phoenix saw the biggest gain among larger cities up +20% followed by San Diego and Seattle. The overall rate of price increases is more than double the pace prior to the pandemic. Tight supply of homes for sale and institutional buyers crowding out some individual buyers are contributing to the price hikes.
After surging in March when Americans received their stimulus checks, consumer spending posted a more modest +0.5% gain in April which was right inline with expectations. As the accompanying graph illustrates, spending plunged at the onset of the pandemic then quickly recovered and it at record levels. Spending will likely continue to grow as consumers spend some of their estimated $2 trillion in excess savings.
Durable Goods Orders, orders for items generally lasting longer than a year, dropped -1.3% due to a continued shortage of computer chips going into many items. In spite of this disappointment, business investment continues to accelerate suggesting businesses remain confident about the future suggesting continued economic growth.
Initial Jobless Claims continue to trend lower coming it at 406,000 for the most recent week compared to 444,000 the week before. We will get a clearer picture of the employment market in the coming week with the May monthly employment report.
Upcoming Economic Reports
- Employment Report
- ISM Manufacturing Index
- ISM Services Index
- Factory Orders
- Construction Spending
- Motor Vehicle Sales