THE WEEK ON WALL STREET
Stocks dropped amid rising long-term bond yields, with sharp declines in high-valuation growth stocks leading the overall market lower. The Dow Jones Industrial Average slipped 1.78%, while the Standard & Poor’s 500 declined 2.45%. The Nasdaq Composite index, home to many high-valuation growth plays, fell 4.92% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, edged up 0.37%.
RISING RATES DERAIL STOCKS
The 10-year Treasury yield climbed last week, from 1.34% to 1.42%, sending shudders through the stock market. While investors generally understand that economic strength may lead to higher bond yields, it was the speed at which bond yields rose that proved unsettling. Generally, when yields rise, bond prices tend to fall. Rising yields also drove sector rotation, with economic reopening stocks (e.g., energy, financials, and industrials) outperforming stay-at-home stocks, especially many of the big technology names. The trend of higher yields was mitigated by testimony on Tuesday and Wednesday by Fed Chair Jerome Powell. He provided some assurances that the Fed remained committed to its current easy money policy stance. A surge in yields on Thursday, however, sparked a new wave of anxiety and a broad retreat that left market averages lower for the week.
POWELL TESTIMONY CALMS INVESTORS
Concerns over rising long-term bond yields and inflationary pressures were eased by two days of testimony by Fed Chair Powell. Powell reiterated the Fed’s intention to stick with its near-zero short-term interest rate policy and monthly bond purchase program until the labor market fully recovers and its inflation goals are met. Powell dismissed market fears of accelerating inflation, noting that he did not see inflation reaching any troubling levels, declaring that any increase would be modest and transitory. He added that the Fed would likely allow inflation to spend some time above its 2% target rate. Inflation for the past eight years straight has been below that target.
THE WEEK AHEAD: KEY ECONOMIC DATA
Monday: Institute for Supply Management (ISM) Manufacturing Index.
Wednesday: Automated Data Processing (ADP) Employment Report. Institute for Supply Management (ISM) Services Index.
Thursday: Jobless Claims. Factory Orders.
Friday: Employment Situation Report.
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Monday: Zoom Video Communications, Inc. (ZM).
Tuesday: Target (TGT), Ross Stores, Inc. (ROST).
Wednesday: Okta, Inc. (OKTA), Marvell Technology Group (MRVL), Dollar Tree, Inc. (DLTR).
Thursday: Broadcom, Inc. (AVGO), Costco Wholesale Corp. (COST), Kroger (KR).
Earnings season is winding down but there are still a handful of companies reporting this week. Highlights include: Zoom Video, Target, Kohl's, Wendy's, Costco, and Kroger. Fourth quarter earnings have not disappointed. According to FactSet, of the more than 85% of S&P 500 companies that have reported, more than 80% have beat their earnings forecasts.
The economic calendar will feature the February jobs report on Friday. According to Dow Jones, economists expect to see 218,000 new payrolls with the unemployment rate holding steady. Wall Street will also be listening very closely to Chairman Powell's comments on Thursday to hear his thoughts on interest rates and inflation.
Have a great week!