Weekly Market Performance – Higher Rates Spook Stocks
US and International Equities
All major market indexes ended this week lower. The MSCI EM Emerging Markets index was the worst performer, falling over 6% this week. The Dow Jones Industrial Average held up best by only losing 1%.
Energy Stands Out in Otherwise Lackluster Week
A major theme this year has been the rebound in the energy sector. The sector began its ascent during the fourth quarter of last year and continues to lead all sectors as 2021’s top performer. Even in the wake of a tough week for the markets, energy managed to motor forward over 5% this week. The global demand outlook has improved as the COVID-19 vaccine rollout has picked up speed recently and we get closer to a fully reopened economy.
The major detractors this week were the consumer discretionary, utilities, and information technology sectors. For the third week in a row, utilities lagged the markets, finishing the week over 3% lower.
In general, given solid fourth quarter earnings reports, an improving economic landscape, and the robust housing market outlook, equity investors have generally become quite bullish. The American Association of Individual Investors survey of bulls versus bears has been climbing, indicating that bulls are outnumbering bears. Even though the ratio is well short of the historical extremes, this is still something to watch, especially given the rally stocks experienced since the March 2020 lows. For more of our thoughts on market sentiment, please read the blog post Sentiment Getting Frothy but Long-Term Bullish.
“We continue to be positive on stocks over bonds, but sentiment may be getting a little hot right now so we wouldn’t be surprised to see volatility pick up,” noted LPL Chief Market Strategist Ryan Detrick. “Bond yields are also a bit stretched, so we may see them retrace a bit if stocks pull back.”
Fixed Income Recap
Bonds, as represented by the Bloomberg Barclays US Aggregate, lost ground for a second straight week as the 10-year Treasury yield moved sharply higher. Many other bond sectors also moved in tandem, as investors continue to anticipate an economic recovery with higher rates.
The Week Belonged to Oil
As mentioned previously, oil finished the week higher while natural gas sold off after strong performance in past weeks. Colder weather across the country helped fuel the rise in natural gas. Copper was the only major metal to finish the week higher in a tough week for the group.
US Economic Data Recap
The Leading Economic Index Signals Potential Reacceleration
The Conference Board released its Leading Economic Index (LEI) report for January on Monday, showing the series rose 0.5% month over month. LPL Research believes the report could represent an early sign that we are beginning to exit a patch of economic weakness and thus be set for a reacceleration. We examine the data release, as well as its implications for future economic growth, in greater detail on the blog titled Leading Indicators Signal Potential for Reacceleration.
Federal Reserve (Fed) Chairman Jerome Powell testified before the Senate Banking Committee on Tuesday that both inflation and employment remain well below the Fed’s goals, reassuring markets that the current monetary policy is likely to stay in effect for some time. Powell also stated that price pressures remain mostly muted and further commented that the economic outlook is “highly uncertain.”
Fed Chairman Powell noted that since the genesis of COVID-19 last spring, consumer prices partially rebounded over last year. However, with sectors that were adversely affected by the pandemic, pricing still remains soft. Fed policy is most likely going to be dependent on COVID-19 mitigation efforts in addition to how quickly the employment picture improves across sectors, especially with regard to the service sector.
In addition, Chairman Powell stated that the real unemployment rate in the United States is closer to 10%. Powell claims this rate is due to misclassification errors being factored into the official government statistics along with individuals dropping out of the labor force. The Bureau of Labor Statistics recently reported the unemployment rate at 6.3%.
Weekly Jobless Claims Decline
This week, jobless claims fell to 730,000 according to the Department of Labor. This was well below the Bloomberg consensus of 825,000, though weather disruptions and seasonal factors may have temporarily depressed new filings for unemployment insurance. Moreover, the prior week’s claims revised lower by 20,000. In addition, continuing claims decline modestly to over 4.4 million.
Consumers Gaining Confidence
The Conference Board’s Consumer Confidence Index rose to over 91 from over 88. In addition, the Present Situation Index jumped 6.5 points as lower COVID-19 cases and fiscal stimulus boosted consumer conditions. LPL Research believes the increase in consumer confidence coincided with January’s massive retail sales growth.
Durable Goods Orders Showing Durability
Orders for durable goods increased by over 3% in January compared to December. This was the most in six months and more than three times the Bloomberg consensus forecast of over 1%. Manufacturing has rebounded in recent months in the wake of COVID-19 supply chain challenges.
Next week, the following economic data is slated to be released:
On Monday, we get January’s report on construction spending, February’s Markit’s Purchasing Manager’s Index as well as the Institute for Supply Management February manufacturing report.
Wednesday is all about automobile purchases as we receive data from the US Bureau of Economic Analysis concerning February automobile and light truck sales.
Thursday provides investors with another weekly initial unemployment claims report. In addition, we receive details on Q4 productivity along with January durable and factory orders.
On Friday, February’s official unemployment report, January’s trade balance along with last month’s labor and payroll data will be published. In addition, January’s consumer credit statistics will be reported.
Next week, as we wrap up the Q4 earnings season, we have just 11 S&P 500 companies reporting earnings results and hosting conference calls.
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