S&P 500 SETS NEW HIGHS BUT ENDS WEEK LOWER DESPITE DOVISH FOMC STATEMENT

The S&P 500 (-0.8%), Dow Jones Industrial Average (-0.5%), And Russell 2000 (-2.8%) Set Intraday And Closing Record Highs In The First Half Of The Week, But They Eventually Ran Into Selling Pressure As Long-Term Interest Rates Continued To Move Higher. The Nasdaq Composite Declined 0.8%, While The Russell 2000 Diverged With A Sharp 3% Decline. 

Starting with the most consequential event this week, the FOMC and Fed Chair Powell struck a dovish and patient tone regarding monetary policy following their two-day policy meeting on Wednesday, which satisfied the market and temporarily calmed down the Treasury market.

Reviewing the highlights and takeaways: There were no changes to 1) the fed funds rate, 2) the median estimate that the fed funds rate would remain unchanged through 2023, and 3) the pace of asset purchases (at least $120 billion per month). Fed Chair Powell said it wouldn't be time to start talking about tapering until the Fed sees actual substantial progress on employment and inflation.

Over the next couple of days, the 10-yr yield flirted with 1.76% amid persisting growth and inflation expectations (Fed won't intervene despite expected transitory inflation pressures this year). Selling interest was further supported by the Bank of Japan widening its trading band around 0.00% for the 10-yr JGB to 50 basis points (from 40 basis points) and the Fed letting the Supplementary Leverage Ratio (SLR) exemption expire on March 31.

The 10-yr yield ultimately settled at 1.73%, or nine basis points above last week's settlement. The higher rates worked against the growth stocks within the information technology sector (-1.4%). The energy (-7.7%), financials (-1.7%), and real estate (-1.0%) sectors also underperformed. The communication services (+0.5%), health care (+0.4%), and consumer staples (+0.2%) sectors closed higher.

Evidently, the energy sector, which dropped 7.7%, was a victim of profit-taking activity after a strong first quarter. WTI crude futures fell 6.3% to $61.45/bbl amid some lingering concerns about the recovery in global oil demand due to Europe struggling with another rise in coronavirus cases.

Economic data was mixed. February retail sales, industrial production, and housing starts/permits data were softer than expected, while the Philadelphia Fed Index soared to 51.8 in March (Briefing.com consensus 23.5) from 23.1 in February. Many think the data will turn more positive in March like the Philly Fed Index, as the $1.9 trillion stimulus package trickles through the economy.

Market Recap - MARKET SNAPS BACK TO RECORD HIGHS

The Dow Jones Industrial Average Set Intraday Record Highs Every Day This Week, Ultimately Rising 4.1% And Closing At A Record High. The Russell 2000 (+7.3%) And S&P 500 (+2.6%) Set New Highs For The First Time In A Month While The Nasdaq Composite (+3.1%) Dug Itself Out Of Correction Territory With A 3% Gain. 

Every sector in the S&P 500 contributed to the weekly advance, with some investors fearful of getting left behind in the rally effort. The consumer discretionary (+5.7%), real estate (+5.7%), materials (+4.4%), utilities (+4.4%), industrials (+3.6%), and financials (+3.2%) sectors outperformed the benchmark index. The communication services sector (+0.7%) trailed with a modest gain.

The advance was supported by a confluence of factors, including the following:

• A buy-the-dip mindset in the heavily-weighted growth stocks, including Tesla (TSLA), which rose 16%.

• President Biden signing the $1.9 trillion stimulus bill and directing all states to make all adults eligible to be vaccinated no later than May 1.

• The ECB saying it expects to conduct asset purchases at a significantly higher pace over the next quarter than during the first months of this year.

• Weekly initial claims decreasing by 42,000 to 712,000 (Briefing.com consensus 725,000) for its lowest level since the first week of last November.

• No surprising headline inflation readings out of the Consumer Price Index and Producer Price Index reports for February.

• Good-enough 3-yr note, 10-yr note, and 30-y bond reopening auctions.

• New York Governor Cuomo saying that restaurants in New York City and New Jersey will expand indoor dining to 50% beginning March 19.

The news flow supported the reopening optimism and inflation expectations, sending the 10-yr Treasury note yield up another nine basis points to 1.64% by week's end -- its highest level since last February. Growth stocks trimmed their weekly gains with this upwards move. 

Interestingly, at the beginning of the week, widely-followed money manager David Tepper told CNBC that the 10-yr yield is likely at, or near, the top of a new range due to the higher yields attracting foreign buyers. This was when the 10-yr yield was trading at 1.61%, so investors will continue to watch the 10-yr yield over the next few weeks for any uncomfortable swings. 

The CBOE Volatility Index dropped 16.1% to 20.69, as investors reduced their hedging exposure amid the bullish price action in the market. 

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.