Despite the Suez Canal blockage, disrupting global trade, U.S. equity indices fluctuated between gains and losses throughout a volatile week. Month- and quarter-end flows hang over the market, but J.P. Morgan’s head quant expects flows to be net positive for equities, opposite of consensus. Also, the monthly jobs report is Friday.
Last Week
U.S. equity indices fluctuated between gains and losses throughout a volatile week but surged in the final hour of Friday’s trade. The Treasury yield rally consolidated amid technical headwinds and dovish Fed comments. The re-opening trade took a deep breath but is still +35% since the November 9 Pfizer vaccine announcement. The Nasdaq Composite failed to finish higher, but it did close notably off the lows. Energy dropped precipitously early on but sharply retraced losses after a cargo ship completely blocked passage in the Suez Canal.
Fed Chair Powell’s testimony reiterated the FOMC’s belief that inflationary pressures would only be temporary. Treasury yields began the week dropping significantly on Monday and Tuesday, as Fed Chairman Powell confirmed the Fed’s commitment to loose monetary policy. He insisted that the he does not believe a surge in inflation this year will be persistent or large. Powell believes that the Federal Reserve has the tools necessary to deal with higher inflation.
Existing home sales fell 6% in February, and new home sales dropped 18% Month-over-Month. However, new home sales are up +8.2% Year-over-Year. Durable goods orders fell for the first time in 10 months. Services activity came in at an 80-month high, supported by the steepest increase in new business in 3 years. Backlogs increased though, while prices surged on unprecedented supply chain disruptions. European PMIs came in much better than expected as well, returning to manufacturing growth for the first time in 6-months. The services sector remains in contraction, hampered by the COVID-19 related lockdowns.
Week Ahead
Month- and quarter-end flows hang over the market this week. The shortened holiday week features a docket full of Tier 1 economic data. Revisiting Friday’s bewildering market movement is critical. Shares of some media and technology companies were cut down significantly. Weekend reports tie this to an over-levered fund’s liquidation. The technology-heavy Nasdaq’s ability to rally sharply in the face of higher yields seems notable too. As the calendar turns, April offers investors a potential seasonal tailwind. Historically, it’s been the strongest month for the S&P500, higher 74% of the time since 1964 by an average +1.7%. Rebalancing could create a few speedbumps though.
Over the last 3 months, 10-year yields have risen 74 basis points, while the major U.S. equity indices have climbed modestly. The S&P 500 and Nasdaq Composite are +5.82% and +1.92% respectively, but equal weight S&P500 is +11.52% as the median stock has performed better than the market-cap behemoths. The monthly jobs report is on Friday, but markets will be closed in observance of Good Friday. Next Sunday’s futures opening could be chaotic as global investors react to our labor market situation, but they also may place more weight on the ADP report mid-week. Both are expected to show solid job creation, but the Fed remains focused on the slack in the labor sector, which is illustrated through the underemployment rate. Tuesday’s consumer confidence is poised to jump sharply given the stimulus deployment and vaccine progress.
Year-to-date index performance; Dow up 8.06%, S&P up 5.82%, and Nasdaq up 1.94% through the close on Friday.
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