By Pete Biebel, Senior Vice PresidentPrint This Post
Investors were likely a little worried as January ended when the last few trading sessions that month saw the market averages drop from record highs to end their worst week in months. Any concern quickly turned to elation as February began with the market’s best week in months. The S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) posted gains every day last week with SPX climbing to new heights on Thursday and Friday. The NASDAQ Composite Index (COMP) had a miniscule loss on Wednesday that interrupted its streak of winning sessions, but it too was at record levels late in the week. Even with its Wednesday stall, COMP ended the week with a net gain of about 6%. That easily outpaced the 4.65% increase in SPX and the 3.89% increase in DJIA.
And, if there was any concern that the some of the air was beginning to leak out of the speculative fervor, that too withered last week as the Russell 2000 Index of small-cap stocks (RUT) racked up a gain of just over 8% for the week. Year-to-date, RUT is up a bit more than 13%.
Market commentators have been citing three catalysts behind this newfound optimism: The ramp up in COVID vaccinations, the increasing likelihood of a fat stimulus package and upbeat earnings reports. After a sluggish beginning in the number of eligible people receiving one of the vaccines, recent weeks have shown a dramatic increase in the daily average of total vaccinations. The expectation for a stimulus package from Congress has been a tailwind for the market for months. Where the market had been discounting a compromise bill somewhat smaller than President Biden’s $1.9 trillion proposal, it now appears likely that the Democrats will be able to force through the larger package in its entirety. And with about 60% of S&P 500 companies having published their fourth quarter reports, the current earnings season has been much better than expected. More than 80% of the companies have reported earnings above analysts’ expectations. Not only will the earnings for the S&P in 2020 be in excess of the upwardly revised estimates, but also the results have caused analysts to bump up their estimates for 2021 earnings.
All eleven of the S&P sectors had net gains last week. At the bottom of the list was the Healthcare sector with an anemic 0.56% gain. No one stock and no one subsector was responsible for the underperformance, rather it was small losses in some of the most heavily weighted names that held back the group. Three of the top four stocks, and six of the top nine had small net losses for the week.
The other relative laggards were sectors that are more sensitive to rising interest rates. The Real Estate (+3.21%), Consumer Staples (+2.61%) and Utilities (+2.32%) sectors can blame rising interest rates for their relative underperformance. The yield on Ten-Year Treasury notes reached a low near 0.51% in August; it climbed slowly but steadily from there and stood at 0.92% at the end of 2020. The yield poked above 1% for the first time in about ten months in early-January. Last week that yield steadily rose from about 1.07% on Monday to end the week at 1.169%, it’s highest level since last March.
Stocks were not the only asset class that enjoyed an all-week rally. Crude oil prices also rose steadily through the week, from about $52 per barrel on Monday to finish near its high of the week just above $57. OPEC countries have continued to restrain production; now, with inventories declining, there is evidence that demand is beginning to increase. That nearly 10% advanced fueled the S&P Energy sector index to just over an 8% gain for the week. That was tops among the U.S equity sectors.
Last week’s gain lifted the Energy sector to a year-to-date gain of 12.3%. That also is the best of the U.S. equity sectors. Only two other sectors have double-digit YTD gains through last Friday. RUT tops the list, up a bit more than 13%. Third best is an index of large-cap stocks in China, which has gained a little over 11% YTD.
The fact that small-caps and Energy were the leaders in last week’s “everything rallies” market, may be a tipoff that things are getting a little crazy. It seems to be a symptom of a market awash in liquidity that is looking ahead to a stronger post-COVID economy. All news is good news.
Having climbed to these wuthering heights, how much further can the market rise? How much longer can this rally continue? On a valuation basis, stocks in general seem to be richly valued, but they still seem to be better values than bonds. On a technical basis, the market is clearly extended. Any relief in that condition brought on by the late-January weakness was undone last week. And market sentiment numbers are still registering excess optimism.
So, while none of the indices is facing any overhead resistance, and while last week’s rally generated some good short-term momentum, the odds of a repeat of last week’s performance are not very good. Giving back some of last week’s gains wouldn’t immediately set off any technical alarms. Even falling back below the 3800 level of SPX would just be giving back about half of what that index gained last week. Falling much more than that would become a little concerning. The 50-day moving average for SPX begins this week just below 3742; breaking below that level would be very concerning.
This week’s earnings announcement calendar isn’t quite as long as it was in the past couple weeks. Nor does it include many of the mega-cap stocks. Most prominent in the lineup are companies in the Consumer Staples sector. By coincidence, that is the only one of the U.S. equity sectors that is in the red year-to-date. The economic report calendar is also relatively short. The CPI data on Wednesday and the Unemployment Claims numbers on Thursday seem to be the only datapoints with the potential to trigger a market reaction.
|Tuesday 2/9/2021||NFIB Small Business Optimism Index, January||95.9||98.0|
|JOLTS Job Openings, December||6.527mm||6.400mm|
|Wednesday 2/10/2021||Consumer Price Index, January, M/M||+0.4%||+0.3%|
|CPI ex Food & Energy, January, M/M||+0.1%||+0.2%|
|Wholesale Inventories, December, M/M||0.0%||+0.1%|
|Thursday 2/11/2021||Initial Jobless Claims||779K||803K|
|Friday 2/12/2021||Consumer Sentiment, February||79.0||80.9|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.