S&P 500, Nasdaq at record highs after Powell’s dovish comments

While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster. – Benjamin Graham

Both the S&P 500 Index and the Nasdaq Composite Index closed at record highs last week as investors cheered Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Economic Symposium last week. The Dow Jones Industrial Average also rose as cyclical stocks that will benefit from an improving economy performed well. While Powell said that the Fed will likely begin tapering its monthly bond-buying program by the end of the year, he also said that interest rate hikes aren’t imminent as the economy is a long way from full employment, which is the second goal of the Fed’s dual mandate along with its 2% inflation target. Powell also reiterated that he still believes that the recent spike in inflation will prove to be transitory and that the economy is improving enough that progress toward maximum employment is attainable. Hearing that interest rates hikes won’t be implemented for a very, very long time was music to investors’ ears and the stock market rallied. There was also good news with regard to the pandemic as the Food and Drug Administration (FDA) granted full approval for the two-dose Pfizer-BioNTech vaccine for Covid-19. Johnson & Johnson also said that its Covid-19 vaccine booster shot showed promising results in early stage clinical trials, significantly increasing virus-fighting antibodies. There were signs, too, that Delta variant cases of the virus were peaking as there was a falling positivity rate in Florida and Texas. As second quarter earnings season winds down, the results continued to be strong as nearly 90% of S&P 500 companies had beaten expectations with companies poised to grow their earnings by almost 95% year-over-year. The economic data released last week was also mostly positive as weekly jobless claims remained near pandemic-era lows, housing data was strong and second quarter gross domestic product (GDP) was revised slightly higher.

Last Week

New home sales in July rose for the first time in four months due in part to additional inventory and strong underlying demand and existing home sales increased for the second straight month and were better than expected. Durable goods orders in July fell slightly but an important gauge of business investment, core durable goods that excludes transportation, were better than expected. Weekly jobless claims were 353,000, slightly higher than in the previous week and just above estimates. Second quarter GDP was revised higher to 6.6% from 6.5%. The core personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, was unchanged from a year ago and the monthly increase was in line with estimates.

For the week, the Dow Jones Industrial Average rose 1.0% to close at 35,455 while the S&P 500 Index increased 1.5% to close at 4,509. The Nasdaq Composite Index surged 2.8% to close at 15,129.

This Week

The August employment report is expected to show that about 750,000 new jobs were created and that the unemployment rate edged lower to 5.2% from 5.4%. Both the ISM Manufacturing and Services Purchasing Manager’s Indexes (PMI) for August are expected to be in the high 50s, indicative of continued strong expansion. The Consumer Confidence Index for August is forecast to be lower than in July, which came in at the highest level since the start of the pandemic.

Among the most notable companies scheduled to report second quarter earnings this week are Zoom Video Communications, CrowdStrike, Docusign, Broadcom, Hewlett Packard Enterprise, Ciena, Campbell Soup, Hormel Foods, Brown-Forman, Land’s End and Smith & Wesson.

Portfolio Strategy

The stock market breathed a sigh of relief last week when Federal Reserve Chairman Jerome Powell said that any interest rate hikes were a long way off. Before his dovish speech on Friday, Dallas Federal Reserve President Robert Kaplan said that he favored tapering monthly bond purchases as early as October due to concerns about inflation. Two other Fed presidents expressed similar sentiments based on the recent spike in inflation. The Fed has met its 2% inflation target as part of its dual mandate but needs to see more data on jobs before it’s ready to begin tapering its bond-buying program. That is why this week’s employment report for August will be the primary focus for investors. A big concern has been the increase in the number of positive cases of the Delta variant of Covid-19 and its possible negative effect on the economy. This worry along with Powell’s dovish remarks last week were responsible for the yield on the 10-year Treasury declining to 1.30% from 1.35% earlier in the week. Strong quarterly earnings have been the primary driver for stock prices recently but with earnings season winding down, it’s unclear what the next catalyst for the market will be. Right now the path of least resistance seems higher, but the market is entering a seasonally weak time of year for stocks as September and October have been two of the worst performing months for stocks. With the S&P 500 and the Nasdaq Composite Index trading at all-time highs and overdue for at least a modest correction, the market is likely to become more volatile as it consolidates its recent gains.