Markets Adjust to the Fed’s Hawkish Tone

The Federal Reserve did not take the punch bowl away on Wednesday, but it did remind everyone at the party that there is a closing time. And it is likely to be sooner than expected. The Fed brought forward its previous view that the first rate hike in the expected eventual tightening cycle would come in 2024. It has now indicated that it may come in 2023, and there may be more than one quarter point rate hike before the end of 2023. That message was followed up on Friday by St. Louis Fed president Bullard, who said somewhat ominously that the Fed has been surprised at the severity of rising inflationary pressures, although the Federal Open Market Committee (FOMC) re-asserted its view that such pressures are transitory, and that the first rate hike could come as soon as late 2022. 

Stocks Shrug off Inflation Pressure

Despite a growing chorus of concern over rising inflationary pressure, stocks climbed to a new closing high last week. The S&P 500® index rose 0.4 percent, its third straight week of gains, to close at 4247, leaving it higher on the year by 13.1 percent. And the complexion of the market leadership looked quite different from the recent past. Healthcare and Real Estate led the way higher at the sector level and were joined by Technology and Consumer Discretionary. Trailing behind, and all with losses on the week, were Financials, Materials and Industrials. 

Can Investors’ Optimistic Views of the Recovery Last?

U.S. equities rallied on Friday following the May jobs report, falling just shy of a closing record high. The S&P 500® index climbed 0.9 percent on the day to end the week at 4229.89. That left the index fractionally short of its May 7th closing high of 4232.60. It was the growth sectors of the index that led the way higher, rallying strongly after bond yields fell on what was perceived as a benign pace of job growth for those concerned about rising inflationary pressure. 

Investors Grapple With a New Normal

The S&P 500® index rose for the first time in three weeks, climbing 1.2 percent. It was enough of a gain to pull the index to a modest gain of 0.5 percent for the month of May, the fourth straight month of gains for the index. For the week, it was the growthier sectors of the index that led the way, including Consumer Discretionary, Communication Services, and Real Estate. Defensive groups trailed, with Utilities, Healthcare, and Consumer Staples each posting losses. The Russel 1000 Growth index posted a gain of 1.6 percent, outperforming the 0.9 percent gain by its value counterpart. 

What’s the Next Catalyst to Push Stocks Higher?

Stocks drifted lower for the second straight week, searching for the next catalyst that will push prices higher. The S&P 500® index slid 0.4 percent last week, following the 1.4 percent decline of the previous week. The index has now treaded water since the middle of April. Investors are no longer surprised by the strength of first quarter earnings, well aware of the improving Covid-19 outlook, although not everywhere, a little nervous regarding the Fed, curious about the volatility in cryptocurrencies, and uncertain about the negotiations around the President’s infrastructure bill. This mix has led to a market that is unsure of its next move. At the same time, the S&P 500 has shown a certain resiliency. At its weakest, the brief decline at the start of the week of May 10 took prices down by just 4.0 percent, and they have since recovered half of that pullback. And the spike in volatility during that brief selloff has since receded.

Equities Reach New Highs on Economic Momentum

U.S. equities continued their surge higher, gaining 2.7 percent last week to close at another record high of 4128 on the S&P 500 Index. That brought the year-to-date rise to 9.9 percent, with almost 4 percent coming just since the start of April. Further evidence of gathering economic momentum came in the form of the ISM services sector report’s rise to a record high. The minutes from the Fed’s March meeting also provided some reassurance that monetary policy is likely to remain on hold for some time. Bond yields also contributed to the positive tone by easing slightly, as the ten-year yield fell 4 basis points to 1.66 percent. That is down from its recent peak of 1.74 at the end of March. High yield spreads also narrowed to their tightest in over two years last week. The dollar eased, and the VIX index declined to its lowest level in over a year.

Investors React to a Series of Changes from the New Administration

U.S. equities resumed their winning ways last week after a one-week hiatus, as the S&P 500® index gained 1.9 percent. Most of that gain came on Inauguration Day, after which the rally petered out as the new administration began to settle in. The index is now higher on the year by 2.3 percent. Both the dollar and the ten-year note yield were little changed on the week.