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Stocks Rebound on Fastest Economic Growth Since 1984

Market Data as of Week Ending: 01/28/2022 unless noted otherwise

Equities

U.S. stock prices rallied on Friday and most of the major indexes ended the week with a small gain. Despite those gains, volatility remains elevated and market sentiment is fragile as the Fed made it clear their top priority in 2022 will be addressing persistent inflation. Growth stocks outperformed value and smaller sized companies generally lagged their larger counterparts. Small caps continue to struggle as the Russell 2000 Index ended the week down nearly 20% from its prior high in November. Strong fundamentals in information technology drove the sector to outperform while higher oil prices supported gains in the energy sector. Industrials, utilities, and consumer discretionary lagged and were among the worst performing sectors. Both developed foreign and emerging market stocks declined for the week and underperformed U.S. stocks, breaking a streak of three consecutive weeks of relative gains.

Bonds

U.S. Treasury yields ended the week slightly higher as the 10-year finished the week at 1.77%. Treasury market volatility seems to have settled for the time being, but the Fed indicated that they are still working through plans to reduce the balance sheet that has nearly $9 billion in mostly treasury and mortgage securities. All segments of the bond market declined; however, government bonds were the best performing asset class and short duration outperformed longer duration bonds. As investors continue to show risk aversion, yields rose for both investment grade corporate bonds and high yield corporate bonds and finished the week above 2.8% and 5.5%, respectively.

Macroeconomic Data

Economic data releases were mixed and headlined by the first estimate of fourth quarter economic growth, as measured by Gross Domestic Product (GDP). U.S. GDP advanced 6.9% for the quarter, which was better than expected, and rose 5.7% for 2021, its fastest pace since 1984. Purchasing Managers Index (PMI) data for the service and manufacturing sectors dropped to 50.8, its lowest level in 18 months as the surge in coronavirus cases caused supply delays and labor shortages. In Europe, composite PMI data fell to 52.4, an 11-month low; however, the manufacturing sector was more resilient than services and reached a five-month high as supply bottlenecks eased in the region.

 

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Stocks Decline for Third Consecutive Week

Market Data as of Week Ending: 01/21/2022 unless noted otherwise

Equities

U.S. stock indexes declined for the third consecutive week as the S&P 500 recorded its worst weekly performance since March 2020. The tech heavy Nasdaq Composite reached a correction level as the index was down more than 10% from its most recent high. Market sentiment continues to be focused on the prospect of higher interest rates to deal with persistent inflation. Growth stocks lagged for the third consecutive week as the threat of higher interest rates and slower economic growth weighs on prices. Smaller sized companies generally underperformed and dispersion across sectors widened. All eleven sectors recorded losses and defensive sectors such as consumer staples, utilities, and real estate outperformed. Consumer discretionary, communication services, and information technology lagged and were among the worst performing sectors. Both developed foreign and emerging market stocks declined for the week but still outperformed U.S. stocks.

Bonds

U.S. Treasury yields rose early in the week, surpassing the highest levels since before the pandemic, but finished the week lower and the 10-year finished the week at 1.76%. Treasury markets have been volatile to start the year, weighing economic data that generally supports higher rates with strong demand for the safe-haven asset. Most segments of the bond market declined; however, government bonds were the outlier as the intermediate and long maturities recorded gains for the week. As investors rotated out of risk assets, yields rose for both investment grade corporate bonds and high yield corporate bonds and finished the week above 2.7% and 5.2%, respectively.

Macroeconomic Data

Economic data releases showed mixed results in a week that lacked a headline report. Existing home sales surged by more than 8% in 2021 to 6.12 million, which according to the National Association of Realtors is the highest level in more than 15 years. Housing starts unexpectedly rose for the month of December and grew by more than 15% in 2021 to nearly 1.6 million. Weekly initial jobless claims unexpectedly jumped to 268,000, the highest since October 2021, as businesses face a surge in coronavirus cases. Inflation is proving to be a problem globally. In Europe, the UK reported that consumer prices increased 5.4%, the fastest rate in nearly three decades.

 

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Stocks Decline on Highest Inflation in Nearly 40 Years

Market Data as of Week Ending: 01/14/2022 unless noted otherwise

Equities

U.S. stock indexes began the year with declines for the second consecutive week. Market sentiment has shifted lower as investors absorb inflation data and the economic impact of the recent surge in coronavirus cases. Growth stocks lagged for the second consecutive week as the threat of higher interest rates and slower economic growth looms large. Smaller sized companies generally underperformed and dispersion across sectors narrowed. Energy was the only outlier, up more than 5% followed by a small gain in the communication services sector. The rest of the major economic sectors declined for the week. Both developed foreign and emerging market stocks ended the week in positive territory and outperformed U.S. stocks.

Bonds

U.S. Treasury markets absorbed the inflation data with ease as yields narrowly rose and the 10-year finished the week at 1.79%. Several Fed voting members, including chair Powell, addressed the threat of persistent inflation. Most segments of the bond market declined with shorter maturities outperforming longer duration bonds. High yield bonds were the outlier as the short and intermediate maturities produced small gains and outperformed. Investment grade corporate bond yields rose while high yield corporate bond yields were little changed and finished the week at 2.7% and 5.1%, respectively.

Macroeconomic Data

Economic data was generally worse than expected and headlined by the highest level of inflation in nearly 40 years. Consumer Price Inflation (CPI) advanced 7.0% in the month of December, compared to the same period one year ago. Excluding energy and food, Core CPI was up 5.5%, reaching a level not seen in more than 30 years. Concerns about growth were amplified by a nearly 2% decline in retail sales for the month of December and weekly initial jobless claims unexpectedly rose to 230,000. In Europe, several countries announced easing of coronavirus restrictions and growth came in lower than expected in Germany. After declining more than 4.5% in 2020, Germany is expected to have advanced only 2.7% in 2021, which is substantially lower relative to other countries in the region.

 

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Stock Indexes Decline as Bond Yields Rise

Market Data as of Week Ending: 01/07/2022 unless noted otherwise

Equities

U.S. stock indexes declined last week as bond yields rose and cases of omicron surged across the globe. Analysts are expecting fourth quarter earnings to grow more than 20% for the S&P 500. If realized, that will mark the fourth consecutive quarter of earnings growth greater than 20%. Despite favorable expectations for the fourth quarter, growth stocks tumbled with the expectation of higher interest rates and potential economic impact of another coronavirus surge. Size was not a significant factor but performance across sectors showed a wide range of outcomes. Energy was up more than 10% followed by gains in the financials, industrials, and consumer staples sectors. The rest of the major economic sectors declined for the week. Both developed foreign and emerging market stocks ended the week with small losses and outperformed U.S. stocks.

Bonds

U.S. Treasury yields spiked, and the 10-year finished the week at 1.76%. The sharp rise in yields follows the release of meeting minutes from the December meeting that indicated an expectation that interest rates may be increased as soon as March. All segments of the bond market declined with shorter maturities outperforming longer duration bonds. Investment grade corporate bond yields and high yield corporate bond yields also rose and finished the week at 2.6% and 5.1%, respectively.

Macroeconomic Data

Economic data showed slower growth in employment with 199,000 jobs added in the month of December. That brought the total to a record of approximately 6.4 million jobs added in 2021, even though there are still nearly 3.6 million fewer jobs prior to the start of the pandemic. In other employment data the JOLTS survey reported that job openings decreased to 10.6 million and weekly initial jobless claims rose to 207,000. The Institute for Supply Management (ISM) reported weaker than expected results for both the manufacturing and service sector but indicated signs that supply challenges are starting to abate. In Europe, inflation reached a record 5% annual increase for countries in the European Union and cases of coronavirus reached record levels.

 

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U.S. Stock Indexes End the Year at Record Highs

Market Data as of Week Ending: 12/31/2021 unless noted otherwise

Equities

U.S. stock prices generally rose as the S&P 500 Index ended the year at a record high. Investors will start the year with a skeptical view to see if the recent surge in coronavirus cases detracted from growth. Analysts are expecting fourth quarter earnings to grow more than 20% for the S&P 500. Value stocks ended the year with solid gains outpacing their growth counterparts for the week and the month of December but lagged for both the quarter and the year. Smaller companies generally lagged for both the week and the month, whereas mid-sized companies outperformed. Most of the major economic sectors delivered gains for the week, but outperformance was concentrated in traditionally defensive sectors such as real estate, utilities, and consumer staples. In a reversal from last week, consumer discretionary, information technology, and communication services sectors lagged. Both developed foreign and emerging market stocks ended the week with gains and outperformed U.S. stocks.

Bonds

U.S. Treasury yields were mostly flat and ended the year approximately 0.6% higher for both the short and intermediate parts of the curve as the 10-year finished at 1.51%. Investors expect the Fed to begin raising short-term interest rates in 2022, which has caused the 2-year treasury note to increase by nearly 0.5% over the past three months. Long duration corporate bonds were the best performing segment of the bond market and short duration government bonds lagged. Investment grade corporate bond yields and high yields corporate bonds finished the year at 2.4% and 4.9%, respectively.

Macroeconomic Data

It was a light week for economic data with housing data and some early retail sales signals headlining the week. Housing data reported mixed results as pending home sales declined more than 2% and home prices increased 0.9%. According to Mastercard, holiday retail sales, excluding automotive, increased 8.5% year-over-year this holiday season and more than 10% compared to the prior year in 2019. Initial jobless claims fell back below 200,000 and remains near a more than fifty year low. In Europe, coronavirus infections surged and several countries such as Portugal and France have announced mandatory work from home measures. In Asia, Japan reported a record high of more than 7% growth in industrial production with strong contributions across a wide range of industries.

 

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