Index Performance
U.S. and International Equities
The major US markets were higher this week, as market participants continue to take inflation concerns in stride. US small cap (Russell 2000) equities were the best performing US asset class this week and still continue to lead as we approach 2021’s mid-year mark. Going forward, LPL Research believes the earlystage bull market along with the young economic expansion could continue to help small caps. Markets overseas finished higher, with emerging market equities (MSCI EM) outperforming the developed markets (MSCI EAFE) for a second straight week.
Real Estate Expands
Real estate continues to rise up this year’s sector leaderboard. With the added economic reopening on the horizon along with recent interest-rate stability, commercial real estate may continue to benefit.
Fixed Income Recap
The Bloomberg Barclays US Aggregate dropped fractionally as yields rose slightly. Most fixed income sectors moved in lockstep. High yield bonds had a solid week with the Bloomberg Barclays High Yield index gaining almost 0.2%.
Metals Lose Some Sheen
Gold, silver and copper all pulled back during the holiday-shortened week. Gold, which was top performer during the onset of COVID-19, is fractionally lower this year. After copper’s strong run this year, the metal pulled back more than 3% this week. Natural gas prices perked higher, returning over 3% this week.
Oil Gushes Higher
This week, West Texas Intermediate (WTI) crude oil reached its highest level since October 2018 given a rapid increase in demand. In addition, the Organization of the Petroleum Exporting Countries (OPEC) agreed this week to keep to the existing pace set in April of gradually increasing supply curbs through July. Since this decision, oil prices have appreciated, with WTI almost reaching $70 a barrel this week. Energy stocks gained over 6% this week on the back of oil’s ascent, bringing the sector’s year-to-date return to over 48%.
Higher oil prices could play a meaningful role in determining the path of inflation. However, rising oil prices should only have an indirect impact on core levels given that these levels exclude both food and energy prices.
“A rebound in U.S. payrolls and an improvement in the U.S. unemployment rate (5.8%) prompted stocks to close the week near all-time highs,” explained LPL Research Senior Vice President and Director of Research Marc Zabicki. “However, activity through most of the week was rather lackluster. Perhaps we are seeing early summer doldrums creeping in, as investors attempt to pinpoint the next upside catalyst.”
U.S. and International Economic Data Recap
Fed Talk
The Federal Reserve (Fed) announced its intention to begin selling off its corporate credit and exchange traded fund (ETF) holdings amassed through its emergency lending facility launched during the onset of the pandemic. The Fed plans to sell the entirety of its holdings, which is over $8 billion in ETFs and over $5 billion in corporate bonds, through year’s end. Given the relatively small size of the holdings, LPL Research does not expect the sales to be disruptive to the fixed income markets. The Fed continues to purchase both Treasuries and mortgage-backed securities each month as part of its quantitative easing efforts. Selling these securities should not be viewed as a sign the central bank will move up its timetable for reducing its monthly asset purchases.
Manufacturing Powers Ahead
The global manufacturing Purchasing Managers’ Index (PMI) reached an eleven-year high amid broadbased strength. India, given COVID-19 challenges, was the one soft-spot, as its PMI fell sharply last month. The Eurozone’s readings exceeded that of the U.S., Japan, and China. The report revealed that longer supplier delivery times and rising backlogs are contributing to higher prices. This is the “transitory” part of the economy that the Fed and LPL Research believe needs to be reconciled in order for inflation to hold steady.
Global Growth Forecast Upgrade
The Organization for Economic Co-operation and Development (OECD) upgraded its 2021 global growth forecast to under 6%, which was an increase from the over 4% projected rate published in December 2020. The report noted the speed of the vaccine roll-out as a key growth driver, while highlighting that vaccine distribution remains uneven worldwide. The United States is expected to be a major driver of global growth this year and above-average growth is likely in 2022, though next year’s growth may lag behind Europe, which is earlier in its recovery.
Initial Jobless Claims Continue to Decline
According to the U.S. Department of Labor, under 400,000 Americans filed for unemployment insurance last week, which was better than the Bloomberg consensus and another new pandemic low. Continuing claims were reported slightly higher than consensus.
Private payrolls increased at their fastest rate since the pandemic began according to data released by ADP. Companies hired over 970,000 in May which was well above the consensus of economists’ forecasts (680,000).
The US economy gained just under 560,000 jobs last month, which fell short of expectations for the second straight month. The unemployment rate fell to 5.8% while the labor force participation rate dropped to under 62%.
Next week, the following economic data is slated to be released:
- Monday: April consumer credit report
- Tuesday: National Federation of Independent Business (NFIB) May Small Business Index, US Bureau of Labor April Job Opening and Labor Turnover Survey (JOLTS) Job Openings, April trade balance
- Wednesday: April wholesale inventories
- Thursday: Weekly initial and continuing claims, May Consumer Price Index (CPI), May hourly earnings and workweek statistics, May Treasury budget
- Friday: June University of Michigan consumer sentiment
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