Dow Jones Stock Market Today – Why This Bull Market Shows No Sign of Ending Soon
The economic data this past week largely underscored the market’s apparent conviction that a rapid recovery is under way. Cyclical equities rose, bonds fell, and investors wrung their hands about higher yields threatening the stock market.
January retail sales jumped 5.3% from December and 7.4% from a year earlier, handily beating expectations—and the January producer-price index likewise surprised to the upside. Thursday morning’s initial jobless claims figures for the latest week broke a several-week trend of declines, while the prior week’s tally was revised higher. But then on Friday, February PMIs from IHS Markit decidedly underscored the health of the recovery: The manufacturing subindex held just below its recent peak, while the services component hit a six-year high.
The Atlanta Fed’s GDPNow model now points to real gross-domestic-product growth at a whopping 9.5% annualized rate in the first quarter. It had been below 5% just 10 days earlier, and it comes before any boost from a $1.9 trillion stimulus package.
DOW JONES GLO(BA)L/DJIA”>
Dow Jones Industrial Average
rose 35.92 points, or 0.11%, to 31,494.32 this past week. The
index slipped 0.71%, to 3906.71, and the
lost 1.57%, to 13,874.46. The yield on the 10-year U.S. Treasury note, meanwhile, ticked up 0.145 percentage point, to 1.344%, as the price of the securities fell. Indexes near record highs and rising yields has been the basic dynamic since late last year.
“The market is painting a picture of optimism: strong growth and rising, but not troublesome, inflation. We agree,” (BofA) Securities U.S. economist Michelle Meyer—who sees GDP growing by 6% in 2021—wrote on Friday. “But there is a delicate balance: strong growth could prompt a faster rise in rates, driving up borrowing costs and weighing on risky assets, limiting upside to economic growth.”
That “delicate balance” means investors may soon be playing the kind of mind games many will remember from the first half of 2019. Back then, good economic data wasn’t always good news for the stock market, because it seemingly lowered the odds of the interest rate cuts the Federal Reserve ultimately followed through with. If the 2021 economic data continue to surprise to the upside, faster inflation and the speed of the recovery could force the Fed to take its foot off the gas sooner than expected, the thinking goes, and that could threaten the bull market.
This time is a bit different, however, for several reasons. Benchmark interest rates are as low as they can be without being negative, and the Fed has made it explicit that it will tolerate periods of higher inflation to make up for past shortfalls. A rate increase is off the table until the economy and employment are in much better shape than they are now. Chairman Jerome Powell is likely to emphasize that at his Congressional testimony this coming week.
And those concerns ignore the fact that yields are rising for the right reasons—because the economy is improving, and because financial markets are getting back to normal after an unprecedented shock.
“If earnings growth continues to show improvement, you can absorb higher bond yields,” says Jefferies equity strategist Steven DeSanctis.
Keith Lerner, chief market strategist at Truist Advisory Services, looked at 16 postwar periods in which yields rose. The S&P 500 was up in 13 of those windows, with an annualized total return of 13%. In other words, rising rates and rising stocks go hand in hand more often than not. An apt parallel might be 2009, when the 10-year Treasury yield increased by 1.6 percentage points and the S&P 500 returned 26%.
“The tug of war over multiples and when the Fed might flinch will inject volatility, but I don’t think that ends the bull market,” he says. “It just moves us to the next phase.” An improving economy should also lower companies’ credit risk, Lerner notes, so the cost of capital needn’t move up nearly as much as yields will.
Sure, under the surface there will be winners and losers from a higher-yield backdrop. High-multiple, long-duration stocks like those of many highflying software companies will be disadvantaged. Bond-proxy sectors like utilities will appear less attractive relative to risk-free Treasuries.
But the economic recovery will be expressed in higher revenue and earnings across the market. As long as those come back faster than rising yields pressure price/earnings multiples, there’s no reason why the bull market need end. Longer-term inflation is another conversation. But for the present, there are better things for stock investors to worry about than a faster-than-expected economic recovery in 2021.
Write to Nicholas Jasinski at [email protected]
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