Markets surge to record on encouraging earnings and pandemic trends
FEB. 09, 2021
Markets staged an impressive rebound this week, with the S&P 500® Index following the worst week since October with the best week since November, gaining more than 4%. Each day was positive for the S&P 500, as pro-cyclical sectors led the rally. Pro-cyclical sectors that lagged last week led the recovery, including small caps and emerging markets, while the index of 20 most-shorted companies has lost 45% since the peak in late January.
The bond market continues to price in the rebound in the economy and the aggressive Treasury issuance, with the 10-year Treasury yield at the highest level since last March, and the yield curve at the steepest level since 2015. Inflation expectations are also rising, driven by worries about an overheating economy and commodity prices that are now up 11% this year and up 17% from a year ago. The 5-year breakeven inflation rate jumped to 2.3%, the highest level since 2013. Risk indicators are showing modest deterioration in liquidity metrics, highlighted by commercial paper spreads rising to the highest level since December and the TED spread at the widest level since August despite strong equity markets.
Congress and the White House continue to debate the size and scope of the next stimulus package, as there is increasing skepticism from both sides of the aisle, including an article by Democratic economist Larry Summers about the impact on inflation, the value of the dollar and financial stability. Survey data shows that nearly 40% of those earning $25,000 to $75,000 used their previous stimulus check to pay down debt and 15% saved it, while only 15% spent it. Similarly, only 15% of those making $75,000 to $150,000 spent it, challenging the stimulus benefit of the initiative.
Covid-19 trends continue to improve in the U.S., with hospitalizations improving and new cases at the lowest level since November, down nearly 50% since the peak in early January. Vaccine doses are being administered at a rate of 1.3 million per day, with the hope to ramp that to 1.5 million. President Biden said in an interview that we will not reach herd immunity until the end of the summer, while Dr. Fauci predicted that we would not return to normal until next fall.
More than half of the S&P 500 companies have now reported fourth-quarter earnings, and the trend now indicates growth of 2% from a year ago, compared with an expected double-digit decline at the beginning of the year. Over 80% of companies are beating estimates by an average of 15%, while managements are noting improved credit quality and the benefit from the work-from-home trend. Estimates for the first quarter are 18% and the full year is at 24%, nearly 5% higher than expected six-months ago.
What to Watch
Light schedule for economic data this week. Inflation data will be in focus, with a report on CPI being released on Wednesday. Other data includes JOLTS job openings on Tuesday and consumer sentiment on Friday. Federal Reserve chairman Jerome Powell speaks mid-week at a webinar hosted by the Economic Club of New York.
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