Market Commentary for the week ending May 15th, 2021
- Retail sales unexpectedly stalled in April after the March surge.
- Everything except gold declined following a broad-based rally the prior week.
- Consumer prices jumped in April and are expected to continue as the economy reopens.
This Week’s Performance Highlights
- Large U.S. stocks were off -1.3% for the week as measured by the S&P 500. The Dow Industrials held up slightly better falling just -1.1% while the NASDAQ Composite continued to underperform falling -2.3%. Small U.S. stocks declined -1.9% but hold onto a +12.9% gain for the year.
- Consumer discretionary stocks, such as homebuilders, restaurants, and apparel companies, were the worst performing sector falling -3.9% for the week followed by another -2.2% decline for tech stocks. Year-to-date technology stocks are now the worst performing sector higher by just +4.8%.
Volatility spiked higher early in the week, as illustrated in the accompanying graph on the far right, but quickly retreated. As the graph shows these short-term spikes in volatility have occurred somewhat regularly the past year.
Source:www.YahooFinance.com symbol: ^VIX
- International stocks fell along with U.S. stocks with developed country stocks off -1.1%. Stocks in Japan fell sharply off -3.0% and are now in negative territory for the year. Eurozone stocks help up much better off an average of just -0.1% helped by a small gain in France and only fractional losses in the U.K. and Germany.
- Emerging markets meaningfully underperformed losing an average of -3.2%. A big portion of this underperformance was due to China’s market falling -4.0% and now down -4.8% year-to-date.
- Gold was the only asset class higher for the week up just +0.6% but remains down for the year by -3.2%. Reports of higher inflation and increased market volatility often result in investors gravitating toward gold.
- Both real estate and commodities were down for the week, down -1.5% and -1.6% respectively, but are still the best performers of all the asset classes in 2021 holding onto gains of +16.8% and +24.2%.
- Bond prices were lower as well, often not the case when stocks are down, driven by inflationary fears and the possibility of higher interest rates. The yield on the benchmark 10-Year U.S. Treasury climbed to 1.626% from 1.577% the week before although it has held below its recent March month-end high.
Retail Sales were flat in April after surging by a revised +10.7% in the prior month. The current month’s number came in below expectations of a +0.8% gain in another sign of some economic headwinds. Although it was a disappointment, the fact that sales continued at the prior month’s elevated pace and sales are meaningfully higher than prior to the pandemic are very positive.
Auto sales, accounting for roughly 20% of all retail sales, remained strong gaining another +3% for the month while nearly every other sector experienced declines. Some economist are predicting a bright future for retail helped by Americans amassing an extra $2 trillion of savings during the pandemic that may get spent.
Inflation is apparent in many areas of our economy and is now showing up in the data with the Consumer Prices Index (CPI), a measure of retail prices, jumping +0.8% in the most recently month. This was far in excess of economists’ expectations of just +0.2%. This was the biggest monthly price gain since the last economic recovery in 2009. Strong demand combined with companies dealing with supply shortages are contributing to the price increases.
As the accompanying graph shows, the year-over-year inflation rate hit a 13-year high of +4.2% and is expected to stay elevated. Our Federal Reserve, tasked with keeping inflation low, says that this current spike in prices is only temporary and will recede once we get past the pandemic and early stages of the economic recovery. Time will tell.
The Producer Prices Index (PPI), a measure of wholesale inflation, also jumped more than expected in April gaining +0.6%. The majority of the price increases were concentrated in many “re-opening” sectors including air travel, medical care, and financial services with many Americans vaccinated and re-engaging in a variety of ways. Year-over-year the PPI has surged +6.2% with the Federal Reserve forecasting this well fall again to the 2% range in 2022.
Industrial Production, a measure of manufacturing output, climbed +0.7% following a revised higher +2.4% in March. April’s gain would have been even stronger had it not been for a -4.3% in motor vehicles and parts output due to supply shortages.
There was a significant and unexpected drop in Consumer Sentiment in the most recent month with the index falling to 82.8 compared to 88.3 the month before. Economists had forecast an improvement to 90.1. The month’s drop in sentiment was the result of consumers not feeling as good about both today’s economic circumstances as well as the outlook for the next six months.
Initial jobless claims continue to trend in the right direction falling to 473,000 for the week compared to 503,000 the week before.
Upcoming Economic Reports
- Housing Starts
- Existing Home Sales
- Initial Jobless Claims
- Manufacturing PMI
- Services PMI