By Pete Biebel, Senior Vice PresidentPrint This Post
The Dow Jones Industrial Average (DJIA) eked out a not-so- inspiring 0.11% gain for the week. That was the good news. The S&P 500 Index (SPX) had a net loss of 0.71% over the course of the week and the NASDAQ Composite Index (COMP) fell a little more than twice as much. I don’t mean to kvetch, but compared to the price action during January, it was just a meh sorta week. Following two of the widest range weeks in months at the end of January and the beginning of February, the past two weeks have had some of the narrowest weekly ranges in the past year. In a Mardi Gras week, stock market activity was slower than a Bourbon Street funeral procession.
Both COMP and SPX saw their highs of the week in the opening minutes on Fat Tuesday, and both spent the last three-quarters of the four-session week in the red. DJIA was able to print slightly higher highs a couple times later in the week, but it gave back nearly all of those gains in a slow slide on Friday. The primary cause of COMP’s underperformance was that technology stocks had apparently given up rallying for Lent. The S&P Technology Sector Index lost nearly 2% last week.
While action in the stock market might have been a yawner, there was plenty of activity in other markets to keep traders wide awake. Perhaps the most significant action was in the bond market. The yield on the benchmark Ten-Year Treasury notes spiked to a one-year high, climbing from 1.20% at the beginning of the week to 1.34%. Keep in mind that that rate was down in the 0.50% to 0.55% range at its late-summer lows, and it was hovering around the 0.80% level coming into the election. The Ten-Year yield stood at 0.92% as 2021 began; the increase in its yield since then corresponds to a year-to-date loss of more than 9% in the value of the Ten-Year Notes.
The higher long-term rates have had a noticeable impact on other fixed-income sectors and on interest-rate-sensitive equity sectors. Leading indices of junk bonds, senior bank loans, investment grade corporate bonds and emerging market bonds were all lower last week. Most of those sectors are now showing year-to-date losses. The S&P Utilities Sector Index sparked back to life around the election on expectations of a more focused push for clean energy. But the sector turned out the lights shortly thereafter. It has clearly underperformed the overall market since then due in large part to the higher long-term rates.
Another action-packed market last week was commodities. Indices for base metals, agricultural commodities and overall commodities were among the biggest gainers last week. One might conclude that the U.S. Dollar had declined further, helping to boost commodity prices. But that wasn’t the case. The Wall Street Journal Dollar Index was actually stronger early in the week and ended the week about where it had started. Well, then crude oil must have rallied again and pulled some of the other commodity markets along with it. Nope. Crude did hit its highest level in a year when it touched $62 per barrel early in the week, but it ended the week below where it had begun.
The real inspiration behind the rallying commodity prices is the combination of expectations for faster global economic growth and expectations for higher inflation. They’re likely also the culprits behind rising interest rates. With a massive stimulus package in the offing and with an equally massive infrastructure spending bill in the works, it seems reasonable to expect that there will be too much money chasing too few goods as the reopening of the economy picks up steam.
The disappointing employment numbers on Thursday got a lot of attention, but they paled in comparison to the seemingly rapt, slack-jawed monitoring of the Congressional hearing that day. All of Wall Street watched as several of the key figures in the spotlight of the spectacular price swings in a handful of short-squeeze stocks a couple weeks ago testified before Congress. Those hours of questioning and testimony confirmed for me that the market is not broken. It was all just an entertaining fluke in a dozen or so tiny stocks with massive short interests. If anything, perhaps regulators will legislate stricter short-sale reporting and crack down on naked shorts. Almost nobody cares if they do. The fiasco might also speed up the reduction in settlement times, from two days to first, one-day settlement, and eventually to real-time settlement. That would generally be a good thing but would be virtually unnoticed by most investors. The hearing also confirmed my opinion of politicians.
A year ago at this time, the market was just beginning its steep decline which bottomed out in late-March. It was a very scary time; no one knew what to expect of the next few months let alone the next year. Now, our economy has survived the storm. Sunnier days are surely ahead. The forward-looking market has been anticipating those better days for months. The market is expecting that another significant dose of stimulus will be just what the doctor ordered to get our anemic economy back on its feet.
Fourth-quarter earnings have been generally better than expected. Estimates for 2021 earnings have increased as a result. Many analysts are now projecting that per-share earnings of the stocks in the S&P 500 will actually exceed their 2019 level, a feat that seemed very unlikely six to nine months ago. Analysts also expect a big increase in share repurchases. Companies that had reined in their plans to buy back their own stock last year, will likely unleash such programs this year.
The real issue now is how much of the coming good news has already been reflected in stock prices. The market seems to be priced for perfection; so, any disappointment could trigger a pullback. The greatest risk now seems to be the threat of higher inflation and higher interest rates. Most analysts seem to be content as long as the Ten-Year rate stays below 1.50%. We should be prepared to react if the increasing expectations for post-COVID inflation push the Ten-Year yield much above that level.
I believe that, from here, additional upside is limited. Even the rosiest of analyst projections for SPX have targets in the low 4000s. In a presentation to our advisors later this week, one of the recommendations I’ll make will be to consider simple hedges for some of their positions in widely held, highly inflated stocks.
Last week’s meh performance didn’t set off any technical alarms. The low for SPX in the late-January decline was just below 3700. Dropping much below 3800 will break the uptrend line connecting the March, October and January lows. That would represent the first cause for concern. Taking out the 3700 level would probably instigate a rush for the exit.
Most of the companies have already reported in the current earnings season. While this week’s calendar has fewer reports than recent weeks, it does include a handful of marquee names. This week’s economic report calendar might generate a few more sparks than in recent weeks. Analysts apparently expect a big increase in the Durable Goods number on Thursday. Also, the consensus for the Personal Income number on Friday is a whopper. The first blast of new stimulus is likely the reason for the big increase.
|Monday 2/22/2021||Chicago Fed National Activity Index, January||0.52||0.40|
|Leading Indicators, January, M/M||+0.3%||+0.3%|
|Dallas Fed Manufacturing Survey, February||7.0||6.7|
|Tuesday 2/23/2021||Case-Shiller Home Price Index, December, M/M||+1.4%||+0.9%|
|FHFA Home Price Index, December, M/M||+1.0%||+0.8%|
|Consumer Confidence, February||89.3||89.7|
|Richmond Fed Manufacturing Index, February||14||14|
|Wednesday 2/24/2021||New Home Sales, January, SAAR||842K||855K|
|Thursday 2/25/2021||Durable Goods Orders, January, M/M||+0.2%||+1.1%|
|Durable Goods ex-Transportation, January, M/M||+0.7%||+0.6%|
|GDP, Q4, Q/Q, SAAR||+4.0%||+4.1%|
|Initial Jobless Claims||861K||815K|
|Pending Home Sales, January, M/M||-0.3%||0.0%|
|Friday 2/26/2021||International Trade Deficit, January||$82.5B||$83.0B|
|Personal Income, January, M/M||+0.6%||+9.4%|
|Personal Consumption Expenditures, January, M/M||-0.2%||+2.2%|
|Wholesale Inventories, January, M/M||+0.1%||+0.3%|
|Chicago PMI, February||63.8||61.0|
|Consumer Sentiment, February||76.2||76.4|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.