THE WEEK ON WALL STREET
Stocks touched new record highs last week as bond yields steadied, a fiscal relief bill was signed into law, and confidence in a strong economic recovery grew. The Dow Jones Industrial Average gained 4.07%, while the Standard & Poor’s 500 tacked on 2.64%. The Nasdaq Composite index rose 3.09% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 3.01%.
Stocks marched higher as bond yields leveled off and the $1.9 trillion stimulus bill moved through the legislative process. A muted inflation number and a better-than-expected jobless claims report evidenced an improving economy absent an attendant rise in inflation. The technology sector was particularly volatile, with the NASDAQ Composite falling into correction territory to start the week as investors rotated into cyclical opportunities. Technology rebounded strongly as bond yields stabilized and bargain hunters purchased tech names at reduced prices. The bounce back propelled the S&P 500 to a record high, while the reopening trade drove the Dow Industrials above 32,000 for the first time. The week ended on a mixed note, with the Dow and S&P 500 adding to their record closes and the NASDAQ Composite trimming its weekly gain.
Treasury auctions to finance federal spending are usually staid affairs, but investor trepidation was high ahead of last week’s auctions of 10-year and 30-year Treasuries. Investors were concerned that lukewarm demand amid a huge supply had the potential to drive yields higher and take the pressure on stock prices lower. As it turned out, Wednesday’s auction of 10-year Notes was received with adequate demand, helped by a tame February inflation number and strong overseas interest. The following day’s 30-year auction also went relatively smoothly, though the auction yield was 36.2 basis points higher than last month’s auction. Despite $120 billion of federal debt issuance last week, yields steadied, easing investors’ interest rate concerns for the moment.
THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: Retail Sales. Industrial Production.
Wednesday: Housing Starts. Federal Open Market Committee (FOMC) Meeting Announcement.
Thursday: Jobless Claims. Index of Leading Economic Indicators.
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Tuesday: Coupa Software (COUP).
Wednesday: Five Below (FIVE), Cintas Corporation (CTAS).
Thursday: FedEx Corporation (FDX), Nike, Inc. (NKE), Dollar General (DG).
The main concern of the markets right now is inflation. Will we get runaway inflation? Runaway, probably not. Inflation will most definitely come. It’s always been here. Prices are always going up. Sure, technology in some instances can cause prices to decrease over time. Think about what a flat screen TV cost 15 years ago versus what you can buy one for today. They’ve become much cheaper. However, pretty much everything else has become more expensive over time. Now, take the government throwing money out of helicopters. Some of that money is going to find its way into the economy. More money chasing the same amount of goods will cause prices to rise. The Fed believes this inflationary pressure will be transient. Just a one off and then things settle down. They may be right; we will just have to see.
The main reason the markets care about inflation is because of what it does to interest rates. Rising inflation will typically cause the Fed to have to push up interest rates to keep the economy from overheating. They do this by making it more expensive to borrow. Therein lies the rub. Markets like easy money policy from the Fed and low interest rates. So, if rates were to go higher there are concerns the market would slow down. For now, though, the helicopter money from the government is likely to push the markets higher as it gets spent and drives up corporate earnings.