Weekly Market Performance – Markets Pullback Amid Fed Signaling
U.S. and international equities
The major US markets ended the week mostly lower on inflation concerns and a hawkish FOMC that signaled an increase in rates may come sooner than expected. The international markets (MSCI EAFE and MSCI EM) weren’t immune to the Fed’s message either, as they both finished lower. The only sectors to outpace the broad based S&P 500 were information technology and consumer discretionary.
The consumer “discretionary” sector
When one thinks of consumer discretionary, products like home furnishings, electronics, and possibly jewelry come to mind. Would Amazon.com come to mind? How about Tesla? The two biggest holdings for the S&P 500 consumer discretionary sector are Amazon and Tesla. Given their hefty combined weighting of 37% of the index, the performance of these two companies plays a major role in the performance of the consumer discretionary sector.
The Rise of Europe
The MSCI Europe Index has gained more than 10% for the last three months. With the exception of real estate, natural gas, and oil, this index has been a top performer for this period. The Euro STOXX 600 missed reaching its fifth straight weekly gain, which would have marked its longest winning streak in nearly 15 years.
Europe has made further progress containing COVID-19, which, in addition to an improving environment for value equities, has made European stocks look increasingly attractive.
Earnings, earnings, earnings
Earnings for the S&P 500 are expected to grow by a very solid 35% in 2021, which is over 15% higher than what was originally expected at the beginning of 2021. Developed international (MSCI EAFE) earnings growth may be even better, with 38% earnings growth expected for the MSCI EAFE this year. This is almost 20% more than what was expected in January 2021. In addition, emerging market equities (MSCI EM) were revised just16% higher this year, but the earnings for the MSCI EM Index are expected to climb over 40% higher in 2021 based on consensus estimates (source: FactSet).
Fixed income recap
The Bloomberg Barclays US Aggregate lost ground this week as yields increased. Many fixed income sectors moved in lockstep. High yield bonds lost less ground compared to other bond categories and the sector continues to be the best performer by far year to date.
This week proved to be trying for commodity investors. Gold, copper, and silver were in the red this week. Natural gas also pulled back as well. Oil remained a bright spot, returning over 1% this week, with West Texas Intermediate (WTI) solidly surpassing the $70 mark.
“The Federal Reserve shook up capital markets a bit this week as members rolled out new indications that policy accommodation could be rolled back,” explained LPL Research Senior Vice President and Director of Research Marc Zabicki. “It now appears the Fed may unveil some guidance on a plan to reduce its bond-buying program perhaps as early as the Jackson Hole Symposium (August). The news pressured stocks, while credit spread tightened and Treasury yields fell.”
U.S. Economic Data Recap
LPL Research sees inflation potentially reaching upwards of 3% this year, but believes that inflation will eventually return to normal trends. In addition, the market appears not to be concerned about inflation given the 10-year Treasury yield peaked in March. If the market was concerned, we believe the 10-year Treasury yield would be higher. For more of our recent thoughts concerning inflation, please read the LPL Research blog titled Why Inflation Worries Likely Just Peaked.
The Federal Reserve (Fed) concluded the Federal Open Market Committee (FOMC) meeting Wednesday and, as most expected, made no changes to current monetary policy. That being said, more Fed members expect two quarter-point interest rate hikes in 2023, which was sooner than expected.
The Conference Board released its Leading Economic Index (LEI) for May this week. The LEI increased over 1% month over month, which represents the third straight month in which the index increased sharply, following a feeble winter.
Initial jobless claims climb back above 400k
According to the U.S. Department of Labor, initial filings for unemployment benefits increased for the first time since April, with over 410,000 Americans filing claims. A consensus of Bloomberg-surveyed economists expected 360,000 new filings. Moreover, continuing claims missed expectations, but were flat compared to the revised total for the prior week.
Next week, the following economic data is slated to be released:
Tuesday: May existing home sales
Wednesday: May building permits and new home sales, Q1 current account, June Markit PMI Composite
Thursday: Weekly initial and continuing claims, May wholesale inventories and durable orders, revised Q1 GDP
Friday: May personal income and personal consumption, June University of Michigan sentiment
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