Drawing Battle Lines

As the first full week in May came to a close, the major indexes produced mixed returns across a wide range. Topping it off, a Friday rally erased some losses from early in the week. The narrowly focused Dow Jones Industrial Average fared best, while the technology-heavy Nasdaq Composite Index recorded its worst weekly loss in two months. Technology shares underperformed within the S&P 500 Index, as well, along with consumer discretionary, utilities, and real estate stocks. Value stocks outperformed their growth counterparts for the third week in a row.

Earnings season continued to wind down over the week, with 442 of the S&P 500 companies expected to have reported first-quarter results by the end of the week. Even with all the volatility in our economy, earnings over the quarter have generally surpassed analysts’ estimates by a wide margin. We are nearly halfway through the second quarter, and more positive momentum and year-over-year appears poised to hold building negative sentiment and other economic forces at bay until the fall.

Inflation was a major conversation point during the week. Warren Buffett commented over the previous weekend that the economy was running “red hot,” and Treasury Secretary and former Federal Reserve Chair Janet Yellen acknowledged on Tuesday that rates may have to rise somewhat to prevent the economy from overheating. (Yellen later clarified that her remarks were not intended to be a prediction or a recommendation for the central bank to raise rates.) Investors remain on the lookout for supply chain constraints and input cost inflation, as Wednesday brought word that copper and lumber prices hit new all-time highs.

The Labor Department reported that non-farm payrolls expanded by only 266,000 in April, a fraction of the nearly 1 million jobs widely expected. While restaurants and leisure companies added 331,000 jobs, manufacturing and retail payrolls fell slightly. The unemployment rate rose a bit, from 6.0% to 6.1%, and March job gains were also revised lower. Some observers pointed to a shortage of available workers in the slowdown in hiring, and increased competition for employees may have been reflected in a surprise 0.7% jump in average hourly earnings over the month. With one-third of the population vaccinated and more money being offered by employers, weekly jobless claims reached a pandemic-era low of 498,000. Although a positive sign, it was not as good as hoped.

The unemployment and job gains data sparked a sharp but temporary decrease in Treasury yields on Friday morning, helping push the yield on the benchmark 10-year note to a two-month low before finishing only slightly lower for the week (remember, bond prices and yields move in opposite directions). Investment-grade corporate bond spreads—the extra yield offered over Treasuries and an inverse measure of the sector’s relative appeal—moved wider alongside weakness in equities early in the week.

Opposing economic forces are preparing to “battle” it out in front of us.  Although we remain positive about the near-term future, understanding, expecting, and desiring challenge and changes is a mentality that we embrace for the times ahead.  This mentality is one, we hope, you will share knowing that through His love and grace, God gives each all of us all of what we need (Proverbs 3:12).  If we look carefully for this, we find that this is wonderfully woven through the fibers of our lives…including our investments.

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

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