Inflation Jitters Send Market Lower, but Investors Buy the Dip at the End of the Week

The Stock Market Finished The Week In Negative Territory, But It Could Have Been A Lot Worse After Hot Inflation Data Upset The Market Mid-Week. The Nasdaq Composite (-2.3%) And Russell 2000 (-2.1%) Were This Week's Losers With Losses Over 2.0% While The S&P 500 (-1.4%) And Dow Jones Industrial Average (-1.1%) Declined Closer To 1%.

Through the first three sessions of the week, the Dow was down 3.4%, the S&P 500 was down 4.0%, the Nasdaq was down 5.2%, and the Russell 2000 was down 6.0%. Over the next two days, the Dow gained 2.4%, the Nasdaq gained 3.0%, the S&P 500 gained 2.7%, and the Russell 2000 gained 4.2%.

The horrible start was attributed to negative momentum in the growth stocks, rotational factors, and a noticeably hot Consumer Price Index (CPI) report on Wednesday. The m/m changes in consumer prices exceeded expectations, and when looking at the last six months to exclude easy base effect comparisons, total CPI was running at an annualized pace of 5.0%.

Investors used the weakness as an opportunity to buy the dip with a little help from several factors:

• A retracement in long-term interest rates, signaling that the Treasury market wasn't concerned about inflation even after receiving additional hot inflation data apart from the CPI report.

• Apple (AAPL) reclaiming its 200-day moving average (123.28) and the S&P 500 respecting its 50-day moving average (4064).

• The CDC saying fully vaccinated people can engage in most activities without masks.

• A view that the market was oversold on a short-term basis and was likely due for a bounce.

Eight of the 11 S&P 500 sectors still ended in negative territory, though, including the consumer discretionary (-3.7%), information technology (-2.2%), and communication services (-2.0%) sectors amid weakness in their mega-cap components. The consumer staples (+0.4%), financials (+0.3%), and materials (+0.1%) sectors closed higher.

It'll be interesting to see how the growth/technology stocks perform moving forward when money has been flowing into the cyclical/value stocks on reopening/inflation expectations and analysts have been calling for sustained underperformance. Many growth stocks are down substantially from their peaks in February.

The 10-yr yield increased six basis points to 1.64% from last Friday's settlement, but this was below the 1.70% settlement on Wednesday. Copper prices decreased 2% to $4.648/lb., representing many of the commodities that cooled off this week.

S&P 500 AND DOW RISE TO FRESH RECORD HIGHS ON CYCLICAL BIAS

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The S&P 500 Started The Week Extending Its Consolidation Pattern Amid A Rotation Into Cyclical Stocks, Then Ended The Week On A High Note As The Gains Broadened Out To The Battered Technology Stocks. The Benchmark Index Rose 1.2% To All-Time Highs, Putting It Behind Another Record-Setting Performance In The Dow Jones Industrial Average (+2.7%).

The Nasdaq Composite declined 1.5% after being down as much as 3.8% this week. The Russell 2000 increased just 0.2% to stay within its three-month consolidation trend. 

From a sector perspective, the cyclical energy (+8.9%), materials (+5.9%), financials (+4.2%), and industrials (+3.6%) sectors scored solid gains; conversely, the information technology (-0.5%) and consumer discretionary (-1.2%) sectors dragged on index performance amid relative weakness in their growth-stock components. 

This was one of the busiest weeks in earnings news, but like the weeks before, the results were not a catalyzing factor this week despite remaining on the side of better than expected. More interesting were the key economic reports that indicated a deceleration in the fast-paced economic recovery and perhaps explained the general lackluster response to earnings. 

Specifically, nonfarm payrolls increased by just 266,000 in April (Briefing.com consensus 1,000,000). The ISM Manufacturing Index for April decelerated to 60.7% (Briefing.com consensus 65.3%) from 64.7% in March. The ISM Non-Manufacturing Index for April decelerated to 62.7% (Briefing.com consensus 65.0%) from 63.7% in March.

The huge payrolls miss was the center of attention for market participants and lawmakers on Friday. The former suspected that the extended unemployment benefits provided a temporary disincentive for workers to seek employment, but this claim was refuted by the Biden administration. The Fed perhaps viewed the report as a justification to refrain from thinking about tapering asset purchases. 

On inflation, the Prices component within the ISM Manufacturing Index reached its highest level since 2008 at 89.6%, corroborating an observation from Warren Buffett that his businesses are seeing "substantial inflation" and that they're raising prices in response to the higher costs they are incurring.

Two things here: while the economic data missed elevated expectations, the ISM reports still indicated robust expansionary activity, and nonfarm payrolls growth was still positive. Interestingly, Treasury Secretary Yellen said interest rates may need to rise somewhat to prevent the economy from overheating, but later walked back her comments to say she wasn't predicting, nor recommending, the Fed to hike rates in response to government stimulus proposals.

Evidently, the peak growth narrative that slowed down the market last week was somewhat weakened this week based on the divide between the Dow (cyclically-oriented) and Nasdaq (growth-oriented). The latter would have outperformed if investors were concerned about economic growth rates. The ARK Innovation ETF (ARKK) -- a proxy for high-growth story stocks -- fell 9% this week. 

The Treasury market, however, remained a signpost for lingering peak growth concerns. The 10-yr yield decreased five basis points to 1.58% amid increased demand.

MARKET SWEATS OUT NEW HIGHS BUT ENDS WEEK MIXED AND LITTLE CHANGED

The Market Was Given A Lot Of Good News This Week, But It Had To Work Especially Hard For Incremental New Highs In The S&P 500 (Unch) And Nasdaq Composite (-0.4%), Which Was A Bit Frustrating For Bullish Investors. The S&P 500 Finished Flat, While The Nasdaq (-0.4%), Dow Jones Industrial Average (-0.5%) And Russell 2000 (-0.2%) Closed Slightly Lower.

Briefly highlighting the heavy slate of positive-sounding developments:

• Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Facebook (FB), and Tesla (TSLA) exceeded expectations on strong revenue growth.

• Fed Chair Powell said it wasn't time to start talking about tapering asset purchases, reiterating it'll take substantial further progress until the Fed's employment and inflation goals are reached. The FOMC left the fed funds rate and pace of asset purchases unchanged, as expected.

• Advance Q1 GDP increased at a 6.4% annualized rate (Briefing.com consensus 6.5%), personal income surged 21.1% m/m in March (Briefing.com consensus 20.5%) on the back of the stimulus checks, and PCE Prices were relatively tame on a year-over-year basis.

• President Biden outlined his $1.8 trillion American Families Plan to Congress. Some Senate Democrats were reportedly against the idea of significantly raising capital gains taxes to help fund the plan, but there was a view that some sort of additional infrastructure spending (traditional/social) will still get done.

And the reaction: three days of sideways activity, followed by one decent up day and then a disappointing finish to the week. The energy (+3.6%), financials (+2.4%), and communication services (+2.9%) sectors did end the week solidly higher, while the information technology (-2.1%) and health care (-1.9%) sectors fell 2%.

So, what happened? Well, in the five weeks leading into JPMorgan Chase's (JPM) earnings report before the open on April 14, the S&P 500 rallied around 8%. In the two weeks since, the S&P 500 gained 1.4%, which suggested that a lot of the earnings news was priced in during the pre-earnings run.

More nettlesome, though, was that the market's behavior to good news this week fed into the "peak growth" narrative, which says that the stock market will find it harder to keep rallying when economic/earnings growth rates moderate. In the meantime, the market just consolidated for the second straight week.

The 10-yr yield increased six basis points to 1.63%.

MARKET SNAPS HOT STREAK AMID CONSOLIDATION ACTIVITY AND TAX NEWS

The Stock Market Finished Mixed And Little Changed In A Week Marked By Consolidation Activity And Heated Tax Discussions. The S&P 500 (-0.1%), Dow Jones Industrial Average (-0.5%), And Nasdaq Composite (-0.3%) Finished Slightly Lower, While The Russell 2000 (+0.4%) Closed Slightly Higher.

Starting with some perspective, the S&P 500 was up 7.0% over the prior four weeks with roughly 95% of its components trading above their 200-day moving averages. Sentiment had gotten really bullish, too, giving credence to the view that the market was due for normal sideways action or a pullback.

The market took the former route, seemingly allergic to selling interest. There was one day of noticeable selling, though, and that was on Thursday after Bloomberg reported that President Biden was planning on proposing increasing the capital gains tax rate to 39.6% from 20.0% for those earning $1 million or more.

This rate would be bumped to 43.4% when including the 3.8% tax on investment income that funds the Affordable Care Act -- and that's before state taxes are applied. Based on the facts that The New York Times published a similar report earlier in the day and that this was a part of the president's campaign, the news was viewed a convenient excuse to take profits.

True to recent usual form, though, investors bought the dip on Friday amid optimistic undertones that comprised of speculation that negotiations could reduce the rate, strategies to work around the taxes, and observations about the market's historical ability to weather tax increases.

Despite the comeback effort, the S&P 500 energy (-1.8%), consumer discretionary (-1.2%), and utilities (-1.0%) sectors still closed lower by at least 1.0%. The health care (+1.8%) and real estate (+2.0%) sectors were the clear winners.

In other key developments, earnings reports continued to beat expectations for the most part, weekly initial claims fell to a new post-pandemic low at 547,000 (Briefing.com consensus 600,000), and new home sales surged to its highest annual rate (1.021 million) since August 2006.

The 10-yr yield was unchanged at 1.57% in a tight-ranged trading week.

GROWS LEGS AS PARTICIPATION WIDENS

Each Of The Large-Cap Indices Rose More Than 1.0% In This News-Heavy Week, With The S&P 500 (+1.4%), Dow Jones Industrial Average (+1.2%), And Nasdaq 100 (+1.4%) Hitting New All-Time Highs. The Nasdaq Composite Increased 1.1%, And The Small-Cap Russell 2000 Increased 0.9%.

Gains were logged across ten of the 11 S&P 500 sectors, including the utilities (+3.7%), materials (+3.2%), and health care (+2.9%) sectors with the biggest gains. The communication services sector (-0.01%) was the lone holdout amid softness in its top-weighted components.

Briefly highlighting the key events, the big banks reported better-than-expected Q1 earnings reports and issued upbeat commentary, core CPI for March was muted on a year-over-year basis at 1.6%, retail sales surged 9.8% m/m in March (Briefing.com consensus +5.3%), Coinbase (COIN) became a public company, and federal agencies recommended a pause in Johnson & Johnson's (JNJ) vaccine.

There were a lot of narratives surrounding these events, but the takeaway for the market was that the good news was good, and the bad news wasn't bad enough to detract from the good news. To illustrate, the JNJ vaccine news was disappointing, but the alternatives are plentiful. Coinbase struggled after its open, signaling buyer exhaustion, but ARK Invest's Cathie Woods scooped up shares.

The market simply showed no quit and respected the bullish trend (particularly in the S&P 500) despite calls for a pullback/consolidation.

In the background, the Fed did what the Fed has done: make sure markets know that it will keep monetary policy accommodative, even as the economy and labor market continue to rebound. Fed Chair Powell added that once substantial progress on its employment and inflation goals has been reached, it will start to taper asset purchases well before it raises interest rates.

The one surprising thing from this week was that long-term interest rates accelerated their monthly downtrend despite strong economic data. The 10-yr yield declined ten basis points to 1.57%, including an 11-bps drop in one day, in a move fueled by short-covering activity.

S&P 500 AND DOW RALLY FURTHER INTO RECORD TERRITORY, NASDAQ OUTPERFORMS

The S&P 500 (+2.7%) And Dow Jones Industrial Average (+2.0%) Kicked Off The Week With A Data-Driven Rally To New Heights, Followed By A Mechanical Grind Higher The Rest Of The Week. The Nasdaq Composite (+3.1%) Outperformed With A 3% Gain, While The Russell 2000 Underperformed With A 0.5% Decline.

Ten of the 11 S&P 500 sectors ended the week in the green. None were more influential than the information technology (+4.7%) and consumer discretionary (+4.2%) sectors, which rose more than 4.0% amid strength in their mega-cap components. The energy sector (-4.1%) was the lone holdout with a sharp 4% decline, as investors took profits.

On Monday, the market keyed off a strong employment report for March, which was released the prior Friday when the stock market was closed, and a record-setting ISM Non-Manufacturing Index for March. The data indicated that the economic recovery is gaining momentum.

What's more, JPMorgan Chase (JPM) CEO Jamie Dimon said in an annual shareholder letter on Wednesday that an economic boom could easily run into 2023. Market reaction to this observation was muted, though, as the market was stuck in consolidation mode. Mr. Dimon also cautioned about the "not-unreasonable possibility that an increase in inflation will not be just temporary."

At the end of the week, the Producer Price Index increased a hotter-than-expected 1.0% m/m in March (Briefing.com consensus +0.5%), bringing its yr/yr increase to 4.2%. The market stood by the Fed's thinking that an increase in inflation would be transitory.

Speaking of the Fed, the central bank's dovish monetary policy was reaffirmed in the FOMC Minutes from the March meeting and by Fed Chair Powell at an event hosted by the IMF this week.

Underlying positive factors for the mega-cap/growth stocks included a recognition that long-term interest rates have cooled off this month, money continuing to reshuffle into these Q1 laggards, and investors possibly front running Q1 earnings reports. The 10-yr yield decreased four basis points to 1.67%.

S&P 500 Tops the 4000 Level in Shortened Trading Week

The S&P 500 (+1.1%) Reached A New Milestone This Week By Topping The 4000 For The First Time, Although The Nasdaq Composite Was The Outright Winner With A 2.6% Gain. The Dow Jones Industrial Average (+0.2%) Also Set An All-Time High, But It Barely Ended The Week Higher, While The Russell 2000 Rose 1.5%.

The week started on a cautious note after Credit Suisse (CS) and Nomura (NMR) warned of potential substantial losses after one of their clients, reportedly Archegos Capital Management, defaulted on margin calls and was forced to sell more than $20 billion in stock in the prior week.

Contagion effects were dismissed by strategists, though, and several U.S. banks with Archegos exposure said their losses were immaterial. The rest of the week saw a return of the heavily-weighted growth stocks, thanks to quarter-end rebalancing/first-of-the month inflows, a retracement in long-term interest rates, and positive-minded analyst recommendations.

The influential information technology (+2.1%), consumer discretionary (+2.2%), and communication services (+3.4%) sectors advanced the most this week with gains over 2.0%. Conversely, the energy (-0.4%), materials (-0.3%), health care (-0.6%), and consumer staples (-0.8%) sectors closed lower. 

Cyclical stocks underperformed despite the ISM Manufacturing Index for March rising to 64.7% (Briefing.com consensus 61.2%) from 60.8% in February and the Conference Board's Consumer Confidence Index jumping to 109.7 in March (Briefing.com consensus 97.0) from 90.4 in February.

Separately, President Biden unveiled a $2.3 infrastructure spending plan on Wednesday that included increases in corporate taxes to help finance the spending. In addition, the White House press secretary said that the administration will seek another stimulus bill after passing the infrastructure plan.

The 10-yr yield increased two basis points to 1.68%, although it was flirting with 1.78% early in the week. The U.S. Dollar Index increased 0.2% to 92.90.

IN A MESSY WEEK OF TRADING, THE S&P 500 FINDS TECHNICAL SUPPORT

The S&P 500 Went Through Some Mild Swings This Week With Technical And Quarter-End Rebalancing Factors In Effect, But It Ultimately Ended With A 1.6% Gain. The Dow Jones Industrial Average (+1.4%) Also Closed Higher, While The Nasdaq Composite (-0.6%) And Russell 2000 (-2.9%) Lost Ground. 

That's not to downplay the week's news flow because there was a lot of noteworthy events, but the market just didn't want to fit into a clean narrative. The 10-yr yield declined seven basis points to 1.66%, but the mega-caps within the consumer discretionary (-0.2%) and communication services (-1.9%) sectors still underperformed. 

One day, the market was rallying on positive-sounding macro news, but it sold off into the close for no apparent reason. The one constant was that the S&P 500's 50-day moving average (3874) proved once again to be a strong measure of support, as it has over the past 11 months. After the benchmark index slipped below it on Thursday, buyers stepped in and followed through over the remainder of the week. All of the S&P 500's weekly gain came on Friday.

Nine of the 11 S&P 500 sectors contributed to the advance, and eight rose at least 2.0%, including the real estate sector with a 4.2% gain. The top-weighted information technology sector gained 2.5%. 

Reviewing some of the week's positive-sounding news:

• President Biden will announce an infrastructure plan next week (reportedly with a price tag of up to $4 trillion).

• Weekly initial claims declined by 97,000 to 684,000 (Briefing.com consensus 710,000) for its lowest level since last March.

• More states said they will expand vaccine eligibility.

• Intel (INTC) announced plans to invest $20 billion to build two semiconductor manufacturing facilities in Arizona.

• The eurozone reported stronger-than-expected flash March Manufacturing PMIs.

In other developments, Fed Chair Powell and Treasury Secretary Yellen testified before Congress on the CARES Act in a non-event for the market. AstraZeneca's (AZN) encouraging U.S. vaccine trial data was questioned by an independent panel, but the company confirmed its vaccine was 76% effective against symptomatic COVID-19. 

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.