Last week, the stock market sold off for the second week in a row, as rapidly rising interest rates create headwinds and continue to drive inflation concerns. Mortgage rates saw their largest one-week increase in nearly a year, and we got an update on the new housing market, labor market, as well as consumer spending for January. Fed Chairman Jerome Powell testified before Congress, and the House passed the $1.9 trillion stimulus bill. This market weekly recap covers details on all of the above, and you can find all the previous Monday Market Update’s here.
Monday Market Weekly Recap for 03.01.2021
The S&P 500 was down 2.4% last week as inflation concerns persisted, in spite of Fed Chair Powell’s testimony to Congress attempting to temper those concerns, as bond yields continued to rise this week. The 10-year and 30-year treasury bond yields are now up 0.50% each since the start of the year, a 55% and 30% increase in yield.
How does this impact you? It increases the interest rates you pay. Last week, we saw 30 year mortgage rates increase to 2.97%, a 16bps increase from the prior week, and the largest one-week increase in nearly a year.
Where are we seeing inflation expectations? A major inflation indicator is the 10 Year Treasury to TIPS spread. Ten-year TIPS yields are currently negative, meaning, current interest rates are lower than expected inflation. The Treasury spread to TIPS closed the week at 2.12%, down slightly from the week prior, but still at the highest level in years. It typically predicts inflation CPI growth about a quarter ahead of time, and at current levels, estimates inflation of about 2% for the coming quarter (vs. latest level for January of 1.4%).
Last Week in the Markets
The stock market has now sold off for two consecutive weeks in a row, while long-term treasuries continue to increase in yield (and decrease in price). Commodities fell slightly for the week, but still have outperformed year-to-date, after a decade of decline, spurred on by inflation concerns, the overall economic recovery and hopes that the Biden administration will increase fiscal spending on infrastructure.
In last week’s stock market sell-off, we continue to see the downturn led by tech stocks, with outperformance in Small Caps and Value stocks, a continued reversal from their underperformance last year, as investors seek higher returns and dividend yields amid inflation concerns.
In the bond market, you can see a similar outperformance of higher risk securities, as investors seek higher sources of return. High Yield bonds, with lower credit and higher interest rates, have significantly outperformed Investment Grade and Treasury bonds year to date.
Though all bond indices are now down year-to-date, as rising yields drive prices down. For more on the inverse relationship between bond yields and bond prices, see 10+ Different Types of Investments under How Bonds Work.
Concerns over inflation have fueled the rise in more speculative investments, like commodities and cryptocurrencies, like Bitcoin. Bitcoin, however, sold off this week on more tweets from Elon Musk. Engaged in a Twitter debate with long-time gold pundit, Peter Schiff, Musk tweeted:
… which seemed to spark a sell-off of all cryptocurrency last week. Bitcoin was down 17% for the week, after nearly doubling for the year through the end of the week prior.
The Economic Weekly Market Recap
This week’s major economic releases included Weekly Jobless Claims, stats on the new housing market, and Personal Consumer Expenditures and Disposable Income for January.
Weekly Jobless Claims
I continue to closely watch the labor market for signs of improvement, as it has experienced the most negative impact in the economy, and its recovery is most critical to a full economic recovery for everyone. On Thursday, weekly jobless claims for the week ending 2/20 decreased to 730,000 from the previous week’s level of 861,000. Some believe the lower level may be misleading and attributable to the winter storm – but it is still extremely elevated relative to pre-pandemic and even past recession highs.
Total insured unemployment, under regular state programs, is down to 4.4 million people, an insured unemployment rate of 3.1%. However, this remains a fraction of those covered under the expanded pandemic and emergency programs at both the state and federal level.
Total insured unemployment under these programs for the week ending 2/6 (this comes at a longer lag) is far greater – 19.0 million, an increase of 0.7 million from the week prior, all under the expanded and extended pandemic assistance programs.
The PEUC, or Pandemic Emergency Unemployment Claims, where we saw the most growth in claims last week, is an extension of unemployment benefits for up to 24 weeks after someone has exhausted their state benefits. Both PEUC and Pandemic Emergency UC, as well as additional federaly weekly benefits are all scheduled to expire at the end of March and phase out in April. However, the new stimulus bill, passed by the House on Friday, and likely to be taken up by the Senate this week, extends these programs through the end of August, as well as expanding the number of weeks of eligibility from 24 to 48.
New Home Sales, Prices & Inventory
On Wednesday, the Census Bureau released new home sales data for January. Inventory remains down (-7.0% vs prior year, -0.6% vs long-term median), while homes sold remains extremely elevated (+4.3% vs December 2020, +19.3% vs prior year, +47.7% vs long-term median). This increased level of sales on lower inventory, as well as rising costs of raw materials like lumber, are driving up prices – +5.3% vs the prior year.
Note that while some of the increased demand is occurring due to the pandemic, home builders sharply decreased inventory, and new home starts after the Great Recession (see light green area section of chart above). For more than a decade post the last recession, they underbuilt. So, while the pandemic may have slowed construction and added to the supply shortage, there has been a shortage building for years.
For more on these longer-term trends in the housing market, check out Is This a Good Time to Buy A House?.
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Disposable Income & Personal Consumption Expenditures
Friday the US Bureau of Economic Analysis released the total disposable personal income (DPI) and personal consumption expenditures (PCE) for January 2021. Data is annualized and adjusted for seasonality.
Income was up 11.4% vs. December, driven entirely by an increase in government social benefits both from the resumption of weekly federal unemployment insurance stipends, as well as direct stimulus checks sent out in January. Government social benefits increased by nearly $2 trillion. Absent this increase, DPI would have been flat.
Despite the double-digit increase to income via government stimulus, PCE was only up 2.4% for the month, while personal savings rates increased from 13.4% in December to 20.5% in January. This is why many are concerned about issuing further, widespread stimulus checks. They are not having their intended economic impact, so long as people choose to save vs. spend them. Note the deviation from the long-term trendlines above.
In many cases, until business and travel restrictions are fully lifted people will not spend them or be able to spend with the businesses who arguably need stimulus most. In other cases, people point to supply chain disruptions creating delays and slowing purchasing and recovery. More on that below.
The Political Weekly Market Report
There were three major political stories from last week relevant to family finances:
- House passed $1.9 trillion stimulus bill on Saturday… but has $15 minimum wage hurdle in the Senate
- Fed Chairman Powell gave his semi-annual testimony to Congress on monetary policy and outlook of the Federal Reserve
- President Biden issued an Executive Order calling for “resilient, diverse, and secure supply chains to ensure our economic prosperity and national security”
Stimulus Bill Update
On Saturday, the House voted in a near party-line vote, 219-212, to pass the $1.9 trillion stimulus. It now must be voted on and approved by the Senate in order to become law.
However, on Thursday, the Senate Parliamentarian ruled that the $15 minimum wage component of the legislation did not meet the strict requirements of reconciliation. Earlier last month, the Senate had already agreed to pass the stimulus under reconciliation. Reconciliation is a rule that allows for a simple 51-vote majority without having to worry about the 60-votes needed to overcome a filibuster… but it can only be used on budget resolutions.
The Senate Parliamentarian effectively has said that the proposed $15 minimum wage law is not a budet resolution, so cannot be passed under reconciliation. The Senate spent the weekend scrambling to see if they could enforce a $15 minimum wage via tax initiatives instead, but have ultimately decided to scrap it and vote on the $1.9 trillion stimulus without it, in order to get it passed quickly.
Since the Senate will vote on an amended version of the bill, it will have to pass the Senate and go back to the House for a second vote, before going to the President Biden to be signed into law. Congress is up against the expiration of federal unemployment benefits, some of which begin to expire as early as March 14th, as an unofficial deadline for getting the stimulus passed so those benefits will not expire and be extended.
Fed Chair Powell Testimony to Congress
Last week, Fed Chairman Jerome Powell gave his semi-annual Monetary Policy Report to Congress, appearing before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday, followed by the House Committee on Financial Services on Wednesday.
His testimony was of greater interest than normal given rising concerns in the market around inflation, largely attributed to the Fed’s monetary policy. As he testified, the Fed remains committed to accomodative monetary policy – this means near-zero overnight lending rates, as well as the ongoing purchase of financial assets in the open market, increasing the money supply – until they see substantial recovery in the labor market and/or actual data demonstrating measurable inflation… not merely the market predicting it is coming.
You can read his full prepared remarks here. I also included a few 2-5 minute excerpts of his responses to key questions from committee members on IGTV under Fed Testimony. These are great to get a sense for what people are concerned about, as well as the Fed’s response.
Supply Chain Concerns
Last, but far from least, President Biden passed an Executive Order last week calling for a review of the country’s supply chains. We are seeing shortages in key industries, which is driving up prices as well, due to supply chain disruptions – be it from a lack of raw materials, a bottleneck in production or manufacturing due to closures during the pandemic or capacity limitations still due to health restrictions.
Many of you shared your own experiences with encountering shortages in the current environment:
- Cars being stolen for parts due to parts shortages
- Lack of new appliances or parts for appliance repairs
- Lumber prices impacting new construction and renovation costs
- Lumber limitations impacting new furniture orders
- Raw materials limiting access to PPE and other medical supplies, like gloves, and driving up costs
- Demand for computers due to remote learning and working has exceeded supply
We’ve also seen auto manufacturers calling production halts due to part and microchip shortages. The Executive Order calls for 100-day Supply Chain Review with reports from various agencies to create resolutions for these issues – though it will likely take far longer to be implemented and resolve the shortfalls.
The Virus Update
While the vaccine continues to be distributed and rolled out nationwide, we still have many months ahead of us of continued precautions… but the trends are solidly headed in the right direction. We did see vaccine rollout slow down slightly the previous week due to the winter storm that impacted a significant part of the country.
Nearly 24 million people are now fully vaccinated, and almost 50 million have received at least one dose.
For the sixth consecutive week, we saw all numbers head in the right direction. New cases and hospitalizations are all down significantly, though we started to see new cases tick up again slightly at the end of last week.
We also now see a decline in daily deaths as well for the last two weeks. However, we also surpassed a very somber milestone – 500,000 deaths due to Covid last week. The declines are attributed to a combination of subsiding from the post-holiday spike, as well as the rollout of the vaccine, which began in mid-December.
We also continue to see progress in the vaccine rollout. Bloomberg is tracking the rollout and administration state by state. We saw a 30% increase in vaccines distributed and a 20% increase in vaccines administered last week relative to the week prior. So far, nearly 24 million people have completed their double dose regimen, representing 7.2% of the population. Many experts believe we need to get to 65-80% vaccinated to achieve herd immunity, which would allow life to resume with some level of normalcy.
In more good news, the FDA gave emergency use authorization to the single-dose Johnson & Johnson vaccine on Saturday. This adds a third vaccine to those available in the United States, and as a single-dose regimen with less stringent storage requirements, is expected to significantly accelerate distribution.
The Week Ahead
Look for updates on Initial Jobless Claims and 30-Year Mortgage Rates every week. Coming up this week? The Employment Report for February is due on Friday.
For More Information…
For a more detailed history of all the metics shared, check out When Will the Economy Recover – updated monthly, which gives a more detailed overview of market and economic indicators, as well as their historical context.
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