Weekly Market Update 6/19/2021

Calm interrupted

After three consecutive weeks of posting small gains, the S&P 500 reversed course, falling nearly 2%. The Dow fared worse, dropping more than 3%—the biggest weekly decline for that index in nearly eight months—while the NASDAQ fell less than 1%.

The S&P 500 (-1.9%) and Nasdaq Composite (-0.3%) started the week at record highs, but the benchmark index ended the week down 2% as value/cyclical stocks sold off after the Fed's policy meeting. The Dow Jones Industrial Average (-3.5%) and Russell 2000 (-4.2%) succumbed to heavy losses of 3.5% and 4%, respectively.  

Value slump

For the second week in a row, an index of value-oriented stocks trailed a growth-stock benchmark by a wide margin, with value tumbling  4.1% compared with a 0.5% gain for growth. The result chipped away at value’s year-to-date outperformance relative to growth.    

From a sector perspective, the financials (-6.2%), materials (-6.3%), energy (-5.2%), and industrials (-3.8%) sectors dropped between 3-6%, while the information technology sector (+0.1%) managed to eke out a positive finish. 

Fed reality check   

A revised outlook issued by the U.S. Federal Reserve on Wednesday rippled across the markets, weighing on stocks and many other assets. Policy makers signaled that they expect to raise interest rates by late 2023—sooner than the Fed had previously projected—and members also boosted their inflation forecast.

The FOMC made no changes to the fed funds rate or the pace of asset purchases, as expected, but the median forecast for the path of interest rates signaled two rate hikes by the end of 2023 -- the prior indication was leaving rates unchanged through 2023. Seven members expected a rate hike in 2022.  

What's more, the Fed increased the interest on excess reserves to 0.15% from 0.10%, and the reverse repurchase rate was increased by five basis points to 0.05%.

Fed Chair Powell struck an accommodative tone following the FOMC policy statement, but St. Louis Fed President Bullard (FOMC voter in 2022), who was often seen as one of the more dovish Fed members, sounded more hawkish in a CNBC interview. Mr. Bullard said he was one of those seven officials who forecast a rate hike next year and said the Fed shouldn't be involved in mortgage-backed securities. 

To be clear, the central bank acknowledged the rising inflation pressures in the economy, most evident this week in the hotter-than-expected Producer Price Index for May, but it remained assured that inflation will moderate and reach the Fed's longer-term goals.

In theory, raising rates modestly would help dampen inflation pressures without being overly restrictive for economic growth. The Fed also said it will provide advanced notice before announcing any decision to make changes to asset purchases.

The downside, though, was that the messaging from the Fed supported the burgeoning view that inflation rates, and growth rates, are peaking as the immediate effects from reopening the economy wear off.

Treasuries remain choppy

Treasuries were mixed, with the economic calendar void of any major releases to close out the week. The yield on the 2-year note gained 5 basis points (bps) to 0.26%, while the yield on the 10-year note declined 6 bps to 1.44%, and the 30-year bond rate decreased 8 bps to 2.02%.

Treasuries remained choppy after yesterday's rebound from Wednesday's drop that lifted yields solidly due to the initial reaction to the Fed's monetary policy decision, in which the Central Bank pulled forward its time frame for when it may begin to raise its benchmark target for the fed funds rate, while boosting its inflation and economic growth forecasts. The U.S. dollar has also rallied noticeably in the wake of the Fed's announcement. Liz Ann Sonders discusses the Fed's decision in her latest article, Fed Still Hasn't Found What it's Looking For, noting that investors will likely remain uber-focused on inflation over the next couple of months. She adds that at least a portion of the upside pressure—the base effects relative to last year’s pandemic-related deflation—should begin to fade quickly, while supply chain disruptions and bottlenecks could take a bit longer and will vary from product to product and industry to industry.

Uneven retail

U.S. retail sales fell 1.3% in May, more than most economists had expected. Analysts said recent retail data show that consumers may be spending less at department stores and more on restaurants, lodging, and travel as vaccination rates rise.

Oil recovery

U.S. crude oil prices rose for the fourth week in a row, climbing to nearly $72 per barrel, the highest level since October 2018. As recently as May 20, oil was trading as low as $62.

The unwind of the reflation narrative was further pressured by a series of other developments: commodities, ex oil, continued to pull back (copper futures dropped 9%); retail sales for May were weaker than expected; weekly initial claims unexpectedly increased; and JPMorgan Chase (JPM) and Citigroup (C) warned of lower trading revenue for the second quarter.

As always, it is my pleasure to bring you this weekly update. If this or anything else is causing you pause or you would like further details, please feel free to reach out to me and we can schedule some time to chat. 

Justin J. Long CFP®
Founder/Lead Advisor
Diazo Wealth Group
702-745-1800 Direct
702-278-6560 Cell

Upcoming Economic Calendar

Source: 1. FactSet

Source: Week in perspective provided by Briefing.com. Briefing.com offers live market analysis on their web site www.Briefing.com.

The data provided is for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. This does not illustrate the performance of any John Hancock fund. The information contained here is not guaranteed as to accuracy or completeness. All economic and performance information is historical and does not guarantee future results.

The Dow Jones Industrial Average is a price-weighted index comprising 30 widely traded blue chip U.S. common stocks. The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on the NASDAQ stock exchange. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. The Cboe Volatility Index (VIX) shows the market’s expectation of 30-day volatility and is constructed using the implied volatilities of a wide range of S&P 500 Index options. Weekly and year-to-date figures for the VIX show percentage changes, not investment returns. The Russell 2000 Index tracks the performance of approximately 2,000 publicly traded small-cap companies in the United States. It is not possible to invest directly in an index.

The Treasury yield curve is derived from available U.S. Treasury securities trading in the market and is provided directly by the U.S. Federal Reserve. The spread measures the difference in yield between two government securities. A normal (positive) yield curve occurs when longer-term rates are higher than shorter-term rates. The opposite holds true for an inverted yield curve. Year-to-date changes in U.S. Treasury bond yields are shown in basis points (bps). One hundred basis points equals one percent.

Oil prices are represented by West Texas Intermediate (WTI) crude oil.

The G20 countries comprise a mix of the world’s largest advanced and emerging economies, representing about two-thirds of the world’s population, 85% of global gross domestic product, and over 75% of global trade.

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