Positive news abounds on multiple fronts: coronavirus cases and hospitalizations have both fallen from recent January highs and the various vaccines deployed around the world are proving to be effective. Plus, corporate earnings continue to rebound from 2020 lows, this week’s unemployment numbers tracked significantly better than expected, and housing and durable goods markets continue to impress to the upside. However, major U.S. stock indices fell during trading on Thursday and Friday to finish lower for the week.
For the week, the S&P 500 Index finished down 2.5%, while the Dow Jones Industrial Average fell 1.8%. Year to date, the S&P is up 1.5%; the Dow has gained 1.1%. First-time unemployment claims of 730,000 were the best result since November, and significantly beat expectations. Continuing claims also fell significantly to 4.4 million. Orders for durable goods (those expected to last more than three years) rose sharply by 3.4% in January, a continuing sign of manufacturing strength. New home sales advanced 4.3% in January, as the sizzling housing market showed little sign of cooling off.
This week, stocks likely retreated in the current positive economic environment for two reasons. First, if GDP growth (and inflation) accelerate faster than anticipated, markets fear the Federal Reserve could be forced to raise short term interest rates sooner than expected – stifling the recovery in the process. Such concern contributed to volatility this week, even though Federal Reserve Chairman Jerome Powell reiterated the Fed’s support for markets in testimony before Congress this week. Powell stated they would neither taper their $120 billion in monthly bond purchases nor entertain raising short-term interest rates until inflation runs slightly above target and the labor market returns to “full” employment. Second, in light of the improving health and economic situation, some question the scope of the next round of Congressional coronavirus spending. The expectation of $2 trillion in further federal aid has largely been priced into stocks; however, that level of stimulus has the potential to overheat the economy (causing the Fed to raise short-term rates). In a potential Catch22, any reduction in the amount of stimulus spending could also lead stocks lower.
We’ve recently noted the potential for a stock market correction, and this week’s events continue to highlight the ongoing likelihood of short-term volatility. Until the U.S. is largely past the virus and economic conditions return to pre-pandemic trendlines, we expect a choppy ride. For more on this topic, please review this recent insightful piece from our associates at J.P. Morgan Asset Management.
As we continue to navigate through the pandemic, our commitment remains to be here for you each step of the way. As always, please contact us with any questions about the economy and your financial plan.