U.S. and International Equities
The growth-laden Nasdaq Composite reversed course this week as traders added risk amongst positive earnings results and improved initial jobless claims. As June approaches, the Nasdaq continues to lag all other major U.S. indexes on a year to date basis. Following strong performance last year supported by resilience in “stay at home” technology names, the technology sector has given way this year to cyclical/value names that tend to perform well during an early economic expansion.
Markets overseas finished higher, with developed international equities (MSCI EAFE Index) outperforming emerging markets (MSCI EAFE Index). So far this year, the MSCI EAFE Index is outperforming the EM Index by almost 7 percentage points.
Health Provides Some Relief
After a rough start to the week amid inflation concerns, we witnessed the markets recover some of their lost ground. Somewhat surprisingly, one of the market’s bellwether defensive sectors, healthcare, led all of the S&P 500 index sectors, with the exception of real estate, this week. Moreover, per last week’s Weekly Market Performance, we noted that the consumer staples sector led all S&P 500 sectors. Thus, for the past two weeks, S&P 500 performance was helped led by two of its most prominent defensive areas, perhaps reflecting concerns among some that stocks have come too far too fast.
Fixed Income Recap
Most fixed income sectors gained marginal ground this week as interest rates moved slightly lower despite improving weekly filings for initial jobless claims. In a positive sign, prices firmed up on the 10-year Treasury during the Wednesday afternoon, Thursday and Friday trading sessions as markets took increasing talk of the Federal Reserve (Fed) tapering bond purchases in stride.
West Texas Intermediate (WTI) crude oil finished the week lower, reversing three straight weeks of gains. Natural gas prices also lost ground this week. After surpassing its 2011 all-time high last week, copper gave back over 3% this week. Both gold and silver continue to gain traction from inflation concerns along with a weakening dollar by finishing higher for the week.
U.S. and International Economic Data Recap
On Wednesday the Fed, through its April meeting minutes, stated that it may be appropriate to begin to consider tapering asset purchases at an upcoming meeting if the economy continues to improve. This may be seen as a sign that the Fed sees both their employment and inflation targets reaching their goals.
Nevertheless, Fed Chairman Powell noted that the recovery currently remains “uneven and far from complete”. With regard to inflation, the Fed essentially took an assured view, noting that the short-term price pressures were transitory and would likely fade as the economy continues to recover. In addition, the Fed anticipated rising demand with the economic reopening, while supply-chain challenges may persist and cause further upward pressure on price levels.
LPL Research agrees with the Fed’s view on inflation. You can read more about our thoughts on inflation in our blog post Hot Inflation Data Jolts Investors. The major question that the markets want answered is how long the “transitory” period will last. This theme could very well influence the rest of this year’s market performance.
Leading Indicators Steady
The Organization for Economic Co-operation and Development’s (OECD) Composite Leading Indicators (CLI) was published this week and the data tends to lead to changes in economic activity. The CLI pointed to steadily improving growth for most of the global economy. You can read more about the CLI through the blog post Global Rebound Continues but Remains Uneven.
Initial Jobless Claims Continue to Decline
According to the U.S. Department of Labor, approximately 444,000 Americans filed for unemployment insurance last week, which was better than the Bloomberg consensus of over 450,000 and another new pandemic low. Continuing claims were slightly higher than consensus as well as last weeks’ claims reading. The pace of the jobs recovery has marginally slowed in recent weeks, however we believe bigger gains lie ahead as the economy reopens.
China’s April Retail Sales and Industrial Production
China’s economy improved at a slower pace last month given retail sales missed expectations. Industrial production in April increased almost 10% year over year, which was less than March’s production growth.
Next week, the following economic data is slated to be released:
- Tuesday: Federal Housing Financing Agency March Home Price Index, March S&P/Case-Schiller Home Price Index, May consumer confidence, April new home sales
- Thursday: Weekly initial and continuing claims, April pending homes sales, April durable orders, Q1 GDP
- Friday: April personal consumption expenditures, April wholesale inventories, May Michigan Sentiment
Earnings season continues to wind down, with only 17 companies reporting earnings results next week.
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