Conway’s QuickTake: Week of May 17, 2021


Here’s What Happened Last Week:

U.S. Equities
Renewed inflation worries dragged down most U.S. stock indexes from recent record highs. Within the S&P 500 Index, the consumer discretionary sector was hit particularly hard. Weakness in constituent, Tesla, weighed on this portion of the market after the company said it would no longer accept Bitcoin as a method of payment based on its large carbon footprint. More defensive sectors, including consumer staples and utilities, generally performed the best in a relative sense. The financials sector also did well, benefitting from a recent uptick in rates. Value stocks outpaced growth equities while large-caps bested small-caps in most cases. In a reversal from last year, U.S. large-cap value stocks now outpace large-cap growth stocks by 13.6% year-to-date. The delta is greater than 20% when comparing the year-to-date results of U.S. small-cap value stocks vs. small-cap growth stocks.

Core inflation realized its largest monthly jump since the early 1980s, spooking markets. The Labor Department reported that consumer prices, excluding food and energy, jumped by 0.9% in April – triple consensus estimates. The Fed continues to stress that inflation pressures are temporary, reflecting supply and demand imbalances from the pandemic and its aftermath. Inflation data is so far, unlikely to trigger shifts in domestic monetary policy. Other economic data was more encouraging. Weekly jobless claims fell to another pandemic-era low of 473,000. April retail sales were flat following a large surge in March. Additional reopening has supported a healthy boost in spending at bars and restaurants. The CDC reported that fully vaccinated people do not need to wear face masks or socially distance when indoors under most circumstances, although individual state guidelines can differ.

Source: iStock 2021

International Equities
Most international equity markets also realized losses last week. Emerging market equities were the hardest hit, shaving off 3% during the period. European shares fell in line with global equity markets on inflation-oriented fears. Japanese stocks fell in sequence with developed market counterparts and accelerating local coronavirus infection rates. Chinese stocks were an outlier, rising strongly over the week buoyed by strong economic data. Most international equity markets remain behind U.S. indexes so far in 2021.

The Indian coronavirus variant was classified as a variant “of concern” from the WHO, although many still expect that current vaccines are effective against it. The European Commission revised its economic growth forecasts to 4.3% for 2021 and 4.4% for 2022, up from prior estimates of 3.8% for both years. They cite rising vaccination rates and easing lockdowns as the basis for these upward revisions. Japanese consumer demand recovered strongly from last year’s coronavirus impact. Household spending rose 6.2% year over year in March, stronger than consensus estimates. Japan extended its state of emergency after recent coronavirus infections were higher than expected. China demonstrated encouraging economic data with its 13th month in a row of rising auto sales and its producer price index rising by 6.8%. Chinese leaders are considering a residential property tax to calm rising home prices and increasing home unaffordability.

Credit Markets
The yield on the 10-year U.S. Treasury rose to nearly 1.7% mid-week, following an upside surprise in inflation data, but then fell back down after the Feds comments that it was so far, unlikely to trigger a shift in monetary policy. Municipal bonds outperformed treasuries but still posted negative returns. Primary demand was soft although technical conditions continue to be supported with positive fund inflows. Investment-grade demand from Asia was robust although inflation and equity market weakness weighed on the sector. Credit spreads rose modestly from historic lows reached in recent weeks. High yield funds reported net outflows.

Looking ahead…

Monday, May 17, 2021
•China Industrial Production
•Japan GDP
Tuesday, May 18, 2021
•Euro area GDP
Wednesday, May 19, 2021
•UK Consumer Price Index
Thursday, May 20, 2021
•US Jobless Claims
•Philadelphia Fed Survey Results
•Japan Core-Consumer Price Index
Friday, May 21, 2021
•US Manufacturing PMI
•US Services PMI

Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, Goldman Sachs Market Monitor, Piton Investment Management

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