U.S. equities slid lower for a second straight week as investors assessed the potential for the Federal Reserve to begin scaling back accommodative policy at upcoming meetings amid continued robust U.S. economic data and rising prices. For the week, the S&P 500 and Dow Jones each ended -0.4% lower while the Nasdaq Composite eked out a 0.3% gain. Even with the recent turbulence, all three indices are within 4% of their all-time highs. Meanwhile, cryptocurrency markets experienced significant selling pressure after Chinese authorities increased efforts to restrain trading and mining of several digital currencies. The S&P Cryptocurrency MegaCap Index, which seeks to track the performance of two of the largest cryptocurrencies, Bitcoin and Ethereum, fell 33% in the week ended on Friday.
Despite elevated valuations and a pick-up in inflation concerns, equity market performance has been underpinned by strong upward revisions in corporate earnings expectations for the year ahead and excess liquidity that has provided sustained inflows to equity markets. In their most recent Flows & Liquidity report, JPMorgan noted average inflows to equity ETFs of $17 billion per week so far this year ($340 billion in total), which is on pace to nearly double the previous record through the first five months of the year set in 2017. Net flows to equity ETFs have been positive every week so far in 2021 except for the last week of March.
With inflation concerns front and center among market participants, the Federal Reserve has continued to push a patient stance that looks through the near-term price pressures with the expectation that the supply chain bottlenecks and impact from reopening will subside over time. However, Fed officials have begun to signal intentions to take the next step in removing accommodative monetary policy in the months ahead if the economic recovery remains strong. The next step will be to begin tapering off asset purchases, which is generally anticipated to begin either later this year or in the first quarter of 2022. The Federal Reserve purchased $8.5 trillion of fixed income securities in 2020 to provide liquidity and backstop a range of credit markets and to offset upward pressure on longer term interest rates. The process of tapering off that support will be very gradual and widely communicated in advance.
In the week ahead, market participants will get updates on consumer spending in April and on the red hot housing sector where insufficient existing supply and new construction relative to demand continues to push home prices higher. Investors will also be on the lookout for updates on President Biden’s infrastructure plan, which has run into snags in working toward a bipartisan agreement as GOP negotiators rejected the President’s $1.7 trillion proposal on Friday. The bill was scaled down from the President’s initial infrastructure plan estimated at $2.3 trillion but was still at a wide gap with Senate Republicans who had outlined a $568 billion plan last month. President Biden and Congressional Democrats may look to push the bill through reconciliation if they are unable to come to a bipartisan consensus.
