Weekly Market Update Highlights
• Headline CPI rose more than 4% year-over-year, and was up 0.8% month-over-month for April, while the core index rose 3.0% and 0.9%, respectively, over the same time periods.
• Following the prior week’s disappointing employment data, initial jobless claims fell to a recovery-low of 473,000 while job openings increased.
• April retail sales were largely flat relative to March, although restaurants notably showed growth, while preliminary consumer sentiment fell in May on inflation fears.
Global equity markets declined last week, notching their worst weekly loss since the last week of February. Broad-based indexes tracking developed markets fared better, as the S&P 500, DJIA and MSCI EAFE fell between 1.0% and 1.4%, while the tech-heavy NASDAQ and the MSCI Emerging Markets indexes fell 2.3% and 3.0%, respectively.
Economic Week In Review
• The hotter-than-expected inflation data sparked an early-week selloff, although most indexes rebounded on Thursday and Friday. The S&P 500 gained over 1% on those days.
• Cyclicals outperformed, with financials (+0.3%), materials (+0.1%) and energy (-0.4%) topping the list. Conversely, growth and technology were the biggest losers: Consumer discretionary, information technology and communication services lost between 2% and 4%. Value and large caps outperformed growth and small caps.
• Both global and U.S. equities have experienced strong inflows so far this year. Investors appear to be looking past rising volatility and focusing on the positives of high liquidity, ongoing stimulus and growing confidence in the economic recovery.
Market Drivers And Risks
• Inflation concerns rise. Equity market volatility rose significantly as inflation data ticked higher.
• Although markets extended losses through Wednesday due to the larger-than-expected rise in consumer prices, equities recovered later in the week thanks to modest declines in commodity prices, including a commitment from the Chinese government to keep the cost of iron ore under control. Oversold conditions also likely helped the late-week rebound.
• It’s a supply issue. In last week’s commentary, we stated our belief that the April employment miss was likely due to a supply issue, not a lack of demand. As we continue to move away from the disappointing report, we grow more confident in this view.
• It appears likely to us that historic levels of stimulus and Covid-related fears remain major headwinds for understaffed businesses. Last week a number of notable headlines supported our theory: 1) the CDC’s surprise announcement allowing vaccinated persons to no longer wear masks or practice social distancing; 2) the Jobs Opening and Labor Turnover Survey that showed over eight million unfilled job openings; 3) businesses beginning to offer wage increases, either through one-time bonuses or permanent wage hikes.
• What’s next? It seems like a confluence of data shocks and lofty expectations have led to a “sell in May” environment. The S&P 500 has continued to hit record highs in 2021 thanks in large part to the ongoing recovery in the global economy. As a result, much of the anticipated recovery may have already been priced in, leaving equities vulnerable to higher volatility.
• The global economic recovery is continuing, although at a rate less predictable than hoped. Earnings growth reached approximately 50% for the first quarter of 2021, and while we don’t expect growth to continue at this level, valuations should compress considerably and ease concerns of an overvalued market. Our focus remains on identifying high quality companies with strong or improving fundamentals and earnings growth tied to the economic expansion.