Strong Company Performance and Solid Economic Data Send Stocks to Another Record High

A strong start to first quarter earnings season, and another round of solid economic reports helped drive U.S equities to their fourth straight week of gains. The big banks easily exceeded earnings expectations on strength in capital markets activity and the release of loan loss reserves, while surging retail sales and housing starts, falling new jobless claims, and rising consumer sentiment provided further evidence of firming economic activity. And half of all Americans have now been vaccinated with at least one shot, contributing to the growing economic optimism. 

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 Closely Watching for Signs of Inflation

In the first of what is expected to be a string of robust economic reports, the labor market added 916,000 new non-farm jobs in March, the strongest growth in jobs since last August and well ahead of the 660,000 expected. In addition, the previous two-month total was revised higher by 156,000. The unemployment rate fell to 6.0, its lowest reading since March, 2020.

Can Stocks Maintain their Momentum with Q1 Coming to a Close?

Despite selling pressure from the liquidation of large blocks of stock by a leveraged family office, a late, powerful surge on Friday drove the S&P 500® index to a new record close at week’s end. The index gained 1.7 percent on the day, more than half of which came in the last hour of trading, allowing the index to edge past the previous record high from March 17. The S&P 500 has now gained 5.8 percent on the year, with a gain of 4.3 percent in March, with three days to go. That brings the February- March rebound from the down January to 7 percent, as stimulus money, accommodative monetary policy, vaccine distribution progress, and risings earnings forecasts are contributing to increasing optimism. Helping last week in particular was a respite from the rise in bond yields. The yield on the ten-year Treasury note fell four basis points to 1.68 percent. It was the first weekly decline after seven straight weeks of higher yields. Also helping last week was a decline in new jobless claims, rising consumer confidence, and a subdued PCE deflator for February. High yield credit spreads narrowed as well. 

On the Cusp of An Economic Boom: What Does it Mean for Investors?

The Federal Reserve left its policy unchanged at last week’s meeting, despite revising sharply higher its expectation for both economic growth and headline consumer inflation this year. The Fed now anticipates Gross Domestic Product (GDP) growth of 6.5 percent this year, up from 4.2 percent in December. The headline Personal Consumption Expenditure (PCE) deflator is now expected to increase by 2.4 percent, compared to 1.8 percent in December, with core prices now expected to rise 2.2 percent versus 1.8 in December. Yet the projection for Fed funds remained unchanged at 0.0-0.25 percent through 2023. 

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.