Market Recap - Strong Week for the Dow, but Not for the Nasdaq or Growth Stocks

The S&P 500 Increased 0.8% In This Volatile Trading Week. The Dow Jones Industrial Average Outperformed With A 1.8% Gain, While The Nasdaq Composite (-2.1%) And Russell 2000 (-0.4%) Continued To Cool Off From Overheated Conditions. Higher Interest Rates Were Blamed For The Underperformance Of The Nasdaq, Which Fell 2.1%.

The energy sector (+10.1%) climbed 10%, buoyed by higher oil prices ($66.09, +4.64, +7.6%), and the financials (+4.3%) and industrials (+3.1%) sectors followed suit with solid gains. The consumer discretionary (-2.8%), information technology (-1.4%), and real estate (-1.4%) sectors were the lone holdouts.

The week started as well as anyone could have anticipated. Each of the major indices rallied at least 2.0% after the FDA authorized Johnson & Johnson's (JNJ) COVID-19 vaccine for emergency use, the House passed the $1.9 trillion stimulus bill (handing it over to the Senate), manufacturing PMIs for February out of the U.S., Europe, and Japan exceeded expectations, and Warren Buffett reminded investors to "never bet against America" in his annual shareholder letter.

Risk sentiment was further supported by new expectations from the Biden administration to have vaccines available for every adult by the end of May, versus prior guidance of July.

Investors, however, sold into strength as long-term rates resumed their recent ascent. From the week's intraday high to the week's intraday low, the S&P 500 was down about 5%, and the Nasdaq was down about 9%. The 10-yr yield briefly matched last week's intraday high of 1.61% before settling at 1.55%, or nine basis points higher from last week.

The spike in rates was catalyzed by persistent expectations for economic growth and inflation, an acknowledgement from Fed Chair Powell that the Fed will not intervene in the Treasury market right now to control longer-dated yields, and by stronger-than-expected jobs growth in February.

Nonfarm payrolls increased by 379,000 (Briefing.com consensus 200,000), and nonfarm private payrolls increased by 465,000 (Briefing.com consensus 195,000). Both followed strong upwards revisions for January.

Selling into strength eventually gave way to the classic buy-the-dip mindset at the end of the week, especially when considering that the underlying stock moves were far steeper than the index declines. This rebound helped the S&P 500 close positive for the week and above its 50-day moving average (3822).

Market Recap - RATE ANXIETY PINS DOWN MARKET

It Was An Ugly Week For The Nasdaq Composite, Which Dropped 4.9% As Long-Term Interest Rates Continued To Rise Sharply And Fuel Valuation-Oriented Concerns. The S&P 500 Fell 2.5%, The Russell 2000 Fell 2.9%, And The Dow Jones Industrial Average Fell 1.8%.

The yield on the 10-yr Treasury note briefly spiked to 1.61% this week, which was above the S&P 500's dividend yield of 1.51% and 52 basis points higher than where it started the month. It settled the week at 1.46% or 11 basis points higher from last week. The 2-yr yield increased three basis points to 0.13%.

Fed Chair Powell addressed the rate situation in his semiannual testimony before Congress, explaining that it was expectations for economic growth and inflation that have contributed to the higher yields. On inflation, Mr. Powell added it could take three or more years for the economy to reach the Fed's inflation goal. In other words, the Fed will stay extraordinarily accommodative for the foreseeable future.

Nevertheless, it was the sharp rate of change that worked against risk sentiment and presumably functioned as an excuse to take profits.

Ten of the 11 S&P 500 sectors closed in negative territory, led lower by the consumer discretionary (-4.9%), information technology (-4.0%), and utilities (-5.1%) sectors with steep declines. The Philadelphia Semiconductor Index fell 4.8%, the iShares Russell 1000 Growth ETF (IWF) fell 4.5%, and the ARK Innovation ETF (ARKK) fell 14.6%.

The energy sector (+4.3%), however, rallied alongside oil prices ($61.45/bbl, +2.30, +3.9%), both of which finished the week with 4% gains.

On a technical level, the S&P 500 briefly fell below its 50-day moving average (3808) on Friday before closing above it.

Market Recap - CYCLICAL STOCKS AND TREASURY YIELDS RISE, BROADER MARKET COOLS OFF

It Was A Good Week For The Financial And Energy Stocks, As Growth/Inflation Expectations Increased, But It Wasn't So Great For The Growth Stocks That Were Previously Supported By Really Low Interest Rates. The Nasdaq Composite Fell 1.6%, The Russell 2000 Fell 1.0%, And The S&P 500 Fell 0.7%. The Dow Jones Industrial Average (+0.1%) Ended The Week Slightly Higher.

Interest rates were still low from a historical perspective, but the quick ascent in long-term rates raised valuation concerns this week. The 10-yr yield rose 15 basis points to 1.35% amid continued selling interest that was supported by a pro-cyclical news cycle. The 2-yr yield increased one basis point to 0.11%.

Briefly, investors received retail sales and producer inflation data for January that exceeded expectations, the latest unemployment data painted the case for additional fiscal stimulus, Treasury Secretary Yellen reiterated the "think big" approach to stimulus, reports suggested that the U.S. will double its vaccine supply in the coming weeks, and earnings reports continued to beat expectations.

The top-weighted information technology sector dropped 1.9%, which weighed heavily on index performance given the sector comprises about 28% of the S&P 500's market capitalization. The health care (-2.5%), utilities (-2.0%), and consumer staples (-1.1%) sectors also posted noticeable declines.

Conversely, the curve-steepening activity in the Treasury market was a boon for the bank stocks within the financials sector (+2.8%), while the energy sector (+3.1%) continued to rally from a low base. Oil prices were volatile after a winter storm forced many refineries in Texas to temporarily shut down.

The cyclical materials (+0.9%) and industrials (+0.7%) sectors were the other two sectors that closed higher for the week.

From a price action perspective, the S&P 500 didn't move all that much this week, even though it closed lower in every session. This suggests the market entered a consolidation phase in which it absorbed the higher rates and cyclical rotation without hurting overall risk sentiment.

Market Recap - Market Grinds Higher To New Records

Most Of The Week's Index Gains Came On Monday, Which Was Then Followed By Four Days Of Relatively Sideways Price Action. The Russell 2000 Outperformed Again With A 2.5% Gain, The Nasdaq Composite Rose 1.7%, The S&P 500 Rose 1.2%, And The Dow Jones Industrial Average Rose 1.0%. Each Index Set Intraday And Closing Record Highs This Week.

The market remained supported by a fear of missing out on further gains, optimism surrounding another fiscal stimulus bill, better-than-expected earnings reports, and increasing COVID-19 vaccination rates and decreasing infection/hospitalization rates.

In addition, Treasury Secretary Yellen said the economy can reach full employment in 2022 if a stimulus bill is passed, and Fed Chair Powell reiterated that interest rates will remain near zero until the Fed achieves its dual mandate of maximum employment and a 2.0%+ inflation rate over time.

Energy, small-cap, and micro-cap stocks saw big gains, as risk sentiment broadened out. The S&P 500 energy sector rose 4.3%, and the iShares Micro-Cap ETF (IWC) rose 3.9%. The Philadelphia Semiconductor Index, however, was the biggest gainer with a 7.9% gain amid bullish analyst commentary surrounding NAND prices and a lingering acknowledgement that the industry is overwhelmed with demand.

Conversely, the utilities (-1.8%), consumer discretionary (-1.3%), and consumer staples (-0.1%) sectors were the lone holdouts this week.

Separately, more companies started to venture into the cryptocurrency space. Tesla (TSLA) disclosed a $1.5 billion investment in bitcoin with plans to accept the digital coin as a payment option, MasterCard (MA) said it plans to support cryptocurrencies on its payment network this year, and BNY Mellon (BK) reportedly said it will hold, transfer, and issue cryptocurrency for its asset-management clients.

The 10-yr yield increased three basis points to 1.20% amid an uptick in selling interest.

INVESTORS BUY THE DIP AND PROPEL MARKET TO NEW RECORD HIGHS

The Stock Market Rebounded Swiftly From Last Week's Decline, With The S&P 500 Finishing Higher In All Five Sessions And Ending The Week With A 4.7% Weekly Gain. The Russell 2000 Gained 7.7%, The Nasdaq Composite Gained 6.0%, And The Dow Jones Industrial Average Gained 3.9%.

All 11 S&P 500 sectors posted weekly gains, ten of which advanced between 2.3% (utilities) and 8.3% (energy). The health care sector (+0.5%) underperformed.

Positive factors this week included shares of GameStop (GME) reverting to the mean, better-than-expected earnings reports, encouraging economic data, reports of increasing vaccination rates, and persistent expectations for additional fiscal stimulus. Alphabet (GOOG) and Amazon (AMZN) headlined this week's earnings reports.

Economic data, good or not-so-good, was construed as positive for the market because 1) if it was good, it showed the economy was improving, which would suggest greater earnings potential and 2) if it wasn't, it supported the thesis for additional fiscal stimulus. Such is life in the bull market.

The January ISM Manufacturing and Non-Manufacturing PMIs came above 50.0% (expansionary territory) for the eighth straight month. The labor market, on the other hand, remained sluggish, and the Congressional Budget Office said it doesn't expect employment to recover to pre-pandemic levels until 2024.

Nonfarm payrolls increased by 49,000 (Briefing.com consensus 50,000) following a 227,000 decline in December, while the unemployment rate improved to 6.3% (Briefing.com consensus 6.7%) from 6.7% in December.

The 10-yr yield increased eight basis points to 1.17% amid persistent selling pressure, as investors continued to bet on improved economic growth. The 2-yr yield decreased three basis points to 0.09%. The CBOE Volatility Index dropped 36.7% to 20.95, as investors dialed back hedging exposure.

Market Recap - Market Falls from Record Highs as Short Sellers Get Squeezed and Brokerage Firms Restrict Trading

The S&P 500 (-3.3%), Nasdaq Composite (-3.5%), And Dow Jones Industrial Average (-3.3%) Fell More Than 3.0% This Week, As Risk Sentiment Was Pressured By A Frenzy Of Short-Squeeze Activity. The Russell 2000 Dropped 4.4%.

To begin, GameStop (GME) entered the week at $65 per share and peaked at $483 per share later in the week, as it become the poster child for the short-squeeze mania/rebellion against short sellers. Things got so wild that brokerage firms restricted trading activity on heavily-shorted stocks like GME, which sent these stocks lower and drew the ire of many market participants.

These brokerage firms eventually eased some restrictions, allowing users to resume their speculation and push these stocks higher at the end of the week. GME shared ended the week higher by 400%. This volatility unnerved the market for multiple reasons, including concerns about fund managers selling long positions to cover their shorts and, for some, the potential for increased regulation.

The drama fixated the market and took away from the batch of better-than-expected earnings reports, including from leading companies like Apple (AAPL), Microsoft (MSFT), Facebook (FB), and Tesla (TSLA). To be fair, MSFT shared did gain 2.7% this week.

All 11 S&P 500 sectors closed lower. The energy sector was the weakest link with a 6.6% decline. On the other end was the real estate sector with a modest 0.2% decline.

In other developments, Fed Chair Powell delivered a dovish-sounding post-FOMC press conference, reports suggested that President Biden's $1.9 trillion stimulus deal could be pushed back to mid-March due to bipartisan objections, and fourth quarter real GDP increased at an annualized rate of 4.0% (Briefing.com consensus 4.4%) despite a challenging macroenvironment.

On the vaccine front, Johnson & Johnson (JNJ) published encouraging data for its one-shot COVID-19 vaccine, although the efficacy rate was much lower than the two-shot vaccines currently on the market. Novavax (NVAX) said its vaccine candidate produced an 89.3% efficacy rate in its Phase 3 trial in the UK.

For what it's worth, the S&P 500 set an intraday all-time high early in the week and ended the week marginally below its 50-day moving average (3716). The 10-yr yield was unchanged at 1.09% despite the market volatility.

Market Recap - The Return Of The Mega-Caps

The Shortened Trading Week Featured Renewed Strength In The Mega-Cap Stocks, Which Drove The Outperformance Of The Nasdaq Composite (+4.2%) And Lifted The S&P 500 (+1.9%) And Dow Jones Industrial Average (+0.6%) In The Process. Including The Russell 2000 (+2.2%), Each Index Set New Record Highs.

Namely, Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), and Facebook (FB) rallied between 6-9% this week amid positive-minded analyst recommendations and an appreciation from Netflix's (NFLX) earnings report that these companies still have serious earnings potential. NFLX shares surged 13.5%.

The iShares US Home Construction ETF (ITB, +8.9%) and Philadelphia Semiconductor Index (+2.7%) were other pockets of strength. Together, the mega-caps, homebuilding stocks, and semiconductor stocks lifted the S&P 500 communication services (+6.0%), information technology (+4.4%), and consumer discretionary (+3.1%) sectors to the top spots.

Homebuilding stocks rallied around positive housing data, including one report that featured the strongest pace of housing starts since September 2006.

Conversely, the financials (-1.8%), energy (-1.6%), and materials (-1.2%) sectors cooled off amid profit-taking interest, with the financials sector unable to gain traction from a host of better-than-expected earnings reports.

In Washington, Joe Biden was inaugurated as the 46th president and signed several executive orders to aid the fight against the coronavirus, and Treasury Secretary nominee Janet Yellen asserted that it's time to "act big" on fiscal stimulus. Republican lawmakers, however, pushed back on President Biden's $1.9 trillion stimulus proposal.

The 10-yr yield decreased one basis point to 1.09% in a quiet week for Treasuries.

Market Recap - STOCKS BACKTRACK FROM RECORDS

The Stock Market Faced Some Selling Pressure During The Second Full Week Of January, But Not Before The Dow And Nasdaq Reached Fresh Record Highs. The Two Indices Surrendered A Respective 0.9% And 1.5% For The Week While The S&P 500 Lost 1.5%. Small Caps Outperformed Notably, Allowing The Russell 2000 (+1.5%) To Finish The Week With A Gain.

The S&P 500 spent the first three days of the week in a slow crawl toward its record from January 8 while the Dow and Nasdaq rose to fresh records. High-beta names were particularly impressive, as the PHLX Semiconductor Index gained 1.9% while the iShares Nasdaq Biotechnology ETF (IBB) climbed more than 2.0% for the week.

High-beta stocks and small caps remained ahead even as the broader market faced some pressure on Thursday and Friday. The losses were concentrated in some of the biggest components like Apple (AAPL), Facebook (FB), and Amazon (AMZN) while less influential names and stocks that stand to benefit from commodity inflation outperformed.

The energy sector fell 4.0% on Friday, but it still gained 3.1% for the week, extending its January advance to 12.7%.

The Q4 reporting season was kicked off on Friday with better than expected earnings from Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC).

Fed Chairman Powell reiterated on Thursday that the fed funds rate will not be raised for a long time.

Market Recap - New Year Kicks Off With Huge Gains In Small-Caps And Energy Stocks

The Record-Setting Run That Ended 2020 Carried Over To The Start Of 2021 As Each Of The Major Indices Set Intraday And Closing Record Highs. The Russell 2000 Was The Hero This Week With A 5.9% Gain, Followed By The Nasdaq Composite (+2.4%), S&P 500 (+1.8%), And Dow Jones Industrial Average (+1.6%).

The S&P 500 topped the 3800 level, the Dow topped 31,000, the Nasdaq topped 13,000, and the Russell 2000 (briefly) topped 2100.

The positive momentum was aided by expansionary December manufacturing PMIs out of the eurozone, Asia, and the U.S.; expectations for more fiscal stimulus after Democrats clinched control of Congress after flipping both Senate seats in Georgia; Saudi Arabia agreeing to cut an additional 1 million barrels/day in February and March; and Tesla (TSLA) reporting record Q4 deliveries.

The energy sector rallied 9.3% amid sharply higher oil prices ($52.25/bbl, +3.98, +8.3%) while the materials (+5.7%), financials (+4.7%), and consumer discretionary (+3.8%) sectors advanced between 3-6%. The counter-cyclical real estate (-2.6%), consumer staples (-1.0%), utilities (-0.7%), and communication services (-0.3%) sectors finished in negative territory.

The tech sector received solid support from its semiconductor components. The Philadelphia Semiconductor Index advanced 5.0% this week.

Notably, the market was able to look past the political unrest in D.C. and a weak December employment report, which showed payrolls unexpectedly decline.

The 10-yr yield rose 19 basis points to 1.11% amid increased selling interest, which benefited bank stocks but weighed on gold prices ($1836.70/ozt, -$57.00, -3.0%).

Market Recap-2020 ENDS WITH STOCK MARKET AT ALL-TIME HIGHS

The Large-Cap Indices Set Fresh Intraday And Closing Record Highs In The Last Week Of The Year. The S&P 500 (+1.4%) And Dow Jones Industrial Average (+1.4%) Both Increased 1.4%, And The Nasdaq Composite Gained 0.7%. The Small-Cap Russell 2000, However, Pulled Back From Record Territory With A 1.5% Decline.

Besides momentum, which was arguably the main driver, supporting factors this week included President Trump signing the $900 billion stimulus and omnibus spending bill, and the UK approving the COVID-19 vaccine from AstraZeneca (AZN) and Oxford for emergency use. Neither were particularly surprising, but the news was good for sentiment reasons.

Ten of the 11 S&P 500 sectors contributed to the advance. The consumer discretionary (+2.0%), communication services (+1.9%), financials (+1.9%), health care (+1.9%), and utilities (+2.5%) sectors outperformed the benchmark index. The energy sector (-0.4%) was the lone holdout and ended the year with a 37.3% decline.

Unsurprisingly, the market wasn't bothered by Senate Majority Leader McConnell saying that the $2000 stimulus checks (an increase from $600) have "no realistic path" to quickly pass in the Senate. It could be taken up in the new Senate in January, but that's an issue for the new year.

The 10-yr yield declined one basis point to 0.92%, leaving it down 100 basis points for the year.

It's also worth mentioning that the S&P 500 ended the year with a 16.3% yearly gain, which was more than the Dow (+7.3%) but less than the Nasdaq (+43.6%) and Russell 2000 (+18.4%).