Dow, S&P 500 close at record highs as economic recovery gains momentum

The best way to measure your investing success is not whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. In the end, what matters isn’t crossing the finish line before anybody else but just making sure that you cross it. – Benjamin Graham

In the aftermath of strong jobs data in March and continued optimism over an economic recovery, all three major stock averages posted gains last week with the Dow Jones Industrial Average and the S&P 500 Index closing at record highs and the technology-heavy Nasdaq Composite Index jumping over 3%. The rally started on Monday as investors reacted to the blowout jobs report released on the previous Friday that was much better than expected. Investors were encouraged by the steady rollout of vaccines and the lifting of restrictions on businesses as well as the fact that the yield on the 10-year Treasury stopped rising and seemed to stabilize, at least for the time being. The yield on the 10-year Treasury had risen from 0.9% at the start of the year to about 1.78% in March as there have been signs that the economy is rebounding and that inflation could begin to increase. This past week, though, the yield on the 10-year Treasury dipped to 1.66%, which benefitted growth stocks in the technology sector as higher rates make future profits worth less. Minutes from the March Federal Reserve meeting also reassured investors that the Fed would remain accommodative. Fed officials indicated that the $120 billion a month in bond purchases were providing substantial support for the economy and that they would likely continue until their goals of maximum employment and price stability were met. They also raised their outlook for economic growth to 6.5% for GDP this year and voiced little concern that inflation would be a problem any time soon. For investors, the dilemma is figuring out how much of this good news is already priced into the market as the S&P 500 sits at an all-time high.

Last Week

The ISM non-manufacturing or services sector index in March surged to a record high and was better than expected as it recorded its highest reading in the survey’s history. The lifting of Covid-19 restrictions and vaccinations have released pent-up demand. The producer price index (PPI) in March jumped a higher than expected 1% and in the 12 months through March has increased 4.2%. It was the biggest year-over-year increase since September 2011. Excluding food and energy, the annual core PPI has risen only 3.1%. Weekly jobless claims totaled 744,000, which was higher than the 694,000 that was forecast. While this number was disappointing, the next few months should produce huge job gains as the economy continues to reopen.

The International Monetary Fund (IMF) raised its growth outlook for the global economy to 6% from 5.5%.

For the week, the Dow Jones Industrial Average rose 2.0% to close at 33,800 while the S&P 500 Index climbed 2.7% to close at 4,128. The Nasdaq Composite Index jumped 3.1% to close at 13,900.

This Week

Retail sales in March are expected to rebound strongly after declining in February as consumers spend their stimulus checks while March housing starts are also expected to show a big increase after falling the previous month. The consumer price index (CPI) for March is forecast to increase moderately, but the core CPI that excludes food and energy should only show a modest increase. The University of Michigan consumer sentiment index for April is expected to be higher than in March, which was the highest reading since the onset of the pandemic a year ago.

The Federal Reserve releases its beige book that provides information on the current economic conditions in the 12 Fed districts.

First quarter earnings season begins this week and banks and other financial companies will lead the way. Among the most notable that are scheduled to report include JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, PNC Financial Services, Goldman Sachs, Morgan Stanley, Charles Schwab, BlackRock and State Street. Other notable companies on the agenda include PepsiCo, UnitedHealth Group, Delta Airlines and PPG Industries.

Portfolio Strategy

The focus for investors this week will clearly be on first quarter corporate earnings, especially from the banks and investment companies. Earnings growth for the quarter is expected to be about 25% with particular strength in those sectors that are cyclical in nature such as consumer discretionary, financials, industrials, energy and materials. Companies in these industry groups should benefit from the economy reopening as more people become vaccinated and fewer restrictions are imposed on businesses. Corporations have also done an excellent job of streamlining their operations and cutting costs, which should boost their bottom lines considerably. Banks have benefitted from a rise in interest rates and a steepening of the yield curve, which has improved their net interest margins.  The fact that the Federal Reserve has indicated there would be no increase in the federal funds rate for the foreseeable future should only help their margins and bank stocks continue to look relatively cheap. In addition to what companies actually report in terms of profits, it will be equally important to hear what companies have to say about their future earnings for the rest of the year. With vaccinations rolling out at a record clip and additional fiscal stimulus on the horizon, the recent positive stock market momentum should continue through the upcoming earnings season.