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Week in Review: May 14, 2021

Recap & Commentary

Markets ended the week lower, spooked by the specter of higher inflation. While investors had been expecting higher inflation in the coming months, April’s CPI readings, which easily surpassed consensus expectations, seemed to catch investors off guard. As a result, the S&P 500 declined 2.1% on Wednesday, its largest single-day loss since February. Losses were even more pronounced for tech and other more highly-valued stocks. In response to the concerns about higher inflation, interest rates jumped with the 10-Year Treasury yield climbing to 1.70%, the highest level in over a month, before ending the week at 1.63%.

In addition to economic data and corporate earnings reports, investors were focused on the ransomware attack of Colonial Pipeline, which provides ~45% of gasoline supplies to the East Coast. Whether intended or not, the attack forced Colonial to shut its pipeline network for nearly five days leading to massive fuel shortages. The attack, coming just several months after the SolarWinds hack, provided another stark example of how susceptible companies, even those related to critical infrastructure, are to cyber attacks.

As of Friday, 91% of S&P 500 companies had reported 1Q21 earnings. According to industry group Factset, thus far, 86% of companies have beaten their earnings estimate. Currently, 1Q21 earnings growth is on tract to be 50.3%, over twice the 23.7% growth expected on March 31.

Economic Bullet Points

The long anticipated surge in inflation arrived in April. On a headline basis, consumer prices (CPI) rose 0.8% in April, well ahead of the expected 0.2% increase. A third of the increase was attributable to prices for used cars and trucks which surged 10%, the largest one-month increase on record dating back to 1953. Prices for airfares, hotels, and car rentals, all things related to the economic “reopening”, jumped 10%, 9%, and 16%, respectively. Compared to a year ago, headline CPI rose 4.2%, the largest annual increase since 2008 and significantly higher than the expected 3.6% increase. On a core basis, inflation rose 0.9% for the month and 3.0% compared to a year ago.

Corroborating the increase in CPI, producer inflation (PPI) rose 0.6% in April, ahead of the 0.3% expected increase. Compared to a year ago, prices rose 6.2%.

Somewhat offsetting concerns about an overheating economy was an unexpected stall in retails sales. After jumping nearly 11% in March, sales were flat in April as the effects of the most recent round of stimulus checks subsided. Sales are expected to increase, however, in the months ahead as the economy continues to reopen and consumers draw down on elevated savings levels.

Consumer sentiment deteriorated in the first half of May impacted by consumers’ concerns about inflation. Expectations for one year inflation rose from 3.4% to 4.6%, a 10-year high, while longer-term expectations rose from 2.7% to 3.1%.

Of Note

The most recent JOLTS (Job Openings and Labor Turnover Survey) report showed a record 8.12 million job openings in March. The report, coupled with the weak April employment report, will likely further the debate over whether or not current fiscal policy is inhibiting the employment recovery.

Market Indices Week of 05/14

S&P 500-1.4%
Small Caps-2.1%
Intl. Developed-1.4%
Intl. Emerging-3.0%
Commodities-1.9%
U.S. Bond Market-0.4%
10-Year Treas. Yield1.63%
US Dollar0.1%
WTI Oil ($/bl)$65
Gold ($/oz)$1,844

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • Empire State Mfg.
  • Philly Fed Mfg.
  • Weekly Jobless Claims

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