U.S. Equities Bounce Higher on Rising Prospect of Stimulus
Bond yields pushed higher. The ten-year Treasury note yield rose seven basis points to close at 1.16 percent, its highest close since March. In early Monday trading this week, the yield has risen to 1.19 percent. Rising inflationary concerns are contributing to the move. January Consumer Price Index reports this week are expected to show both headline and core inflation at 1.5 percent year-over-year. Last week’s economic data did show an increase in prices paid by manufacturers in the ISM PMI report, to their highest level in ten years. Unit labor costs also rose sharply in the fourth quarter. High yield credit spreads narrowed last week after two weeks of modest increases, and now sit at their tightest since before the market selloff began last February.
Energy stocks were among the strongest last week. The XLE ETF rose 8.2 percent and is now higher by 12 percent for the year. WTI crude oil rose $4.65 a barrel to close at $56.85, its highest close in over a year, and has gained 17 percent since the start of the year. Financials added 6.7 percent last week, with particular strength in banks. Foreign stocks joined in the rally as well. The MSCI All Country Ex-U.S. index rose 3.6 percent, pushing it into positive territory for the year. Asian stocks outside of China were particularly strong once again, as were stocks in the Eurozone. The UK was a notable laggard.
Contributing to the rising expectation of additional fiscal stimulus in the U.S. was the tepid January labor report. The Unemployment Rate did fall to 6.3 percent, its lowest level since the surge higher last April. But the 49,000 new non-farm jobs created was roughly half what was expected. In addition, the previous two-month total was revised lower by 159,000. Not surprisingly, particular weakness was seen in leisure and hospitality, and retail. Also contributing to the stimulus expectations was the Congressional passage of a budget resolution, with Vice President Harris casting the tie-breaking vote in the Senate, paving the way for stimulus to be passed through the reconciliation process if bipartisan negotiations prove unproductive.
Also contributing to the improved sentiment is the slowing pace of new coronavirus infections in the U.S. In just the past three weeks, the seven-day moving average of new infections has declined by more than half, and is now below where it was in early November before the start of the holiday season surge. Hospitalization and death rates are lower as well. Over 41 million vaccine doses have now been administered in the U.S. Assuming most of those are first doses, that would represent about twelve percent of the population.
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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.
XLE Energy Sector ETF: Energy companies in this index primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, and ConocoPhillips.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. When the VIX is low, volatility is low. When the VIX is high volatility is high. the VIX typically bounces between a range of approximately 18-35 the majority of the time but has had outliers as low as 10 and as high as 85.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
The ISM manufacturing index, also known as the purchasing managers' index (PMI) is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
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