By Pete Biebel, Senior Vice PresidentPrint This Post
Some of you boomers will recognize that as the title of a song by the band Santana from back in the olden days. It struck me as an apt description of how the market sees the coming economic impact of the post-COVID, fiscally reinvigorated economy. In addition to many of the nation’s spenders having already been fully vaccinated, the country has been showered with billions of dollars of free money fiscal stimulus. The rate of new vaccinations is accelerating, and state-wide mask mandates are gradually decreasing. Bank accounts are flush and savers are champing at the bit to get out and spend some money. More and more people are now doing what had been unimaginable until recently: simple pleasures like eating in restaurants, going to movies and renting condos for summer vacations. Things are clearly picking up, and everybody expects that the trend will continue.
It’s not too surprising then that last week was another good one for stocks. The NASDAQ Composite Index (COMP) gained a little over 3%, its best week in two months. The S&P 500 Index (SPX), which climbed above the 4,000 level for the first time late in the prior week, gained another 2.7% last week to close at a new high near 4140. The Dow Jones Industrial Average (DJIA) also registered a new high, gaining just under 2% for the week to finish just above 33,800. The Russell 2000 Index of small-cap stocks (RUT) had been by far the star performer through the first 2 ½ months of the year, but its star faded significantly through late-March. Recent strength has recovered about half of the March decline, but with last week’s 0.7% loss, RUT ended the week about 5% below its record high.
What I found surprising about last week is that, in what seemed like an up-up-and-away, all-week rally, virtually all of the gain came in just a few hours of trading. The first hour last Monday and the opening gap-up on Thursday provided most of the week’s gain. The vast majority of the trading hours last week saw very dull, narrow-range trading. The market’s ascension on Monday’s opening was attributed to the very strong employment numbers that were reported on the morning of Good Friday when the stock market was closed for the holiday weekend. Thursday’s gain was propelled by the resurging big tech stocks, with COMP gapping up more than 100 points on the opening.
The third rush of buying came in the final 45 minutes on Friday. Early that day, the Producer Price Index report came in much worse than expected. Headline PPI jumped 1.0% in March versus expectations for just a 0.4% increase. Core PPI, which ignores the food and energy components, was also much worse than expected at +0.7% against a +0.2% consensus guess. That could have been bad news for interest rates and, in turn, stocks. The 10-Year Treasury yield did spike from near 1.63% to above 1.68% that morning, but it stalled well below the 1.7% level and it quickly retraced the early increase. Stocks inched cautiously higher as the bond market apparently found reasons to ignore the increased threat of inflation. As trading moved into the final hour, and with the 10-Year rate still relatively subdued, traders seemed to throw caution to the wind and chased stocks higher into the close.
In February and March, the market demonstrated its sensitivity to suddenly higher interest rates. The rally in large-cap stocks stalled, the high growth names sold off and small-caps rallied relative to everything else. Over the past few weeks, as the 10-Year yield has stabilized, large-caps and growth stocks have resumed their outperformance, and small-caps faded. The market can cope with higher rates if they’re relatively stable; it’s those sudden spikes higher that are a little unnerving. It’s kind of like Ricky Bobby trying to drive with a live cougar in the car: The initial threat can induce panic, but you can learn to live with it.
We all know that everything is going to get better. Employment will continue to improve; GDP will grow rapidly; earnings will increase; everything’s coming our way. And, the market will continue higher, maybe. The trick will be to determine at what point the market has become too optimistic about the future. In the same way that the market averages bottomed last year long before economic conditions began to improve, the averages could see intermediate-term highs well before economic conditions peak.
There’s no doubt that stocks can get ahead of reality. Some of the mega-cap tech stocks, which rocketed higher off the March 2020 low, have been just trading sideways for the past six months. Many of the shelter-at-home winners apparently got way ahead of reality as some of those stocks have declined 30% to 40% from their recent highs. More recently, small-cap stocks went on a tear as prospects for an economic reopening improved. But they too apparently got a little overheated. The group has been on a cold streak the past few weeks.
As of Friday, 93% of the S&P 500 component stocks were above their 200-day moving averages. That statistic rarely gets higher than that. SPX is now nearly 40% above its 200-week moving average. That’s very extended. Though COMP is a little less extended now than it was at its February high, it’s still about 65% above its 200-week average. It all means that, although the party is just getting started, much of the cake may have already been eaten. Much of the expected economic improvement may already be priced into the market.
The technical dashboard shows that we’re firing on all cylinders, but some of the gauges indicate that we’re running a little too hot. While there’s no overhead resistance for SPX and DJIA, their extremely extended state suggests that they’re due for a timeout.
This will be the first week in a new earnings season as companies release results from the first calendar quarter. Big banks and other financial services firms are traditionally among the early reporters. The reports from banks might be especially interesting, partly because they’re coming off a quarter with the most favorable interest rate differentials in years, but also because the recent easing of Fed restrictions could result in the announcement of increased stock buy-back plans.
The week also brings a long list of economic reports. The consensus expectations for many of those reports anticipate big increases over the previous readings as our economy continues its rebound. Tuesday’s CPI data will be one report in which traders definitely do not want to see a big increase. Last month’s Retail Sales numbers were held back by severe storms in February and a month-on-month comparison to robust January numbers which were inflated by stimulus checks. The Industrial Production and the Manufacturing output numbers on Thursday are expected to make big swings up from previous negative readings. Friday’s Consumer Sentiment reading could have its largest monthly gain in years.
|Monday 4/12/2021||Dallas Fed Manufacturing Survey, March||17.2||12.5|
|Tuesday 4/13/2021||NFIB Small Business Optimism Index, March||95.8||99.0|
|Consumer Price Index, March, M/M||+0.4%||+0.5%|
|CPI ex-Food & Energy, March, M/M||+0.1%||+0.2%|
|Wednesday 4/14/2021||Import Prices, March, M/M||+1.3%||+0.9%|
|Export Prices, March, M/M||+1.6%||+0.9%|
|Fed Beige Book|
|Thursday 4/15/2021||Initial Jobless Claims||744K||695K|
|Philadelphia Fed Manufacturing Index, April||51.8||43.0|
|Retail Sales, March, M/M||-3.0%||+5.6%|
|Retail Sales ex-Vehicles & Gas, March, M/M||-3.3%||+4.4%|
|Empire State Manufacturing Index, April||17.4||17.0|
|Industrial Production, March, M/M||-2.2%||+2.8%|
|Manufacturing Output, March, M/M||-3.1%||+3.6%|
|Business Inventories, February, M/M||+0.3%||+0.5%|
|Housing Market Index, April||82||83|
|Friday 4/16/2021||Housing Starts, March, SAAR||1.421mm||1.620mm|
|Consumer Sentiment, April||84.9||89.0|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.