US stock market
Last week one of the comments about the US stock market was “Consolidation is likely, and a correction too. With most of the companies have reported earnings and revenue that beat estimates, the question now is what can drive the stock market higher? Profit-taking and concerns about valuation can send stock indices and stocks lower, but what about higher?”.
For the week ending on Friday, February 19, 2021, the major indexes ended mostly lower, although there was a holiday-shortened trading week. The Dow Jones was almost flat, and Nasdaq Composite (COMP) had the biggest losses. Still at record highs for major stock indices, the selling pressure this week was not excessive.
The key highlight for the week was the surge of the 10-yr bond yield to 1.3450%, which is the highest level in almost a year. This yield trend should be monitored for various reasons. The first point is if the yield continues to increase then there could be a shift to money invested from stocks to bonds which are considered safer financial assets and less risky compared to stocks.
Second, a higher bond yield increases the discount rate for the valuation of stocks. And a rise from under 1% for the 10-yr bond yield back in January 2021 to 1.3450% in February 2021 is not a factor to go unnoticed. On the contrary, it has severe implications for the stock market valuation, and also the inflation expectations.
Also, I must mention the fact that there were Congressional hearings related to the recent GameStop (GME) frenzy and stock price manipulation. I have trust in the SEC that it will continue to monitor such unusual trading activities that to my opinion are clear stock price manipulation schemes, which are illegal. I would also expect fines and charges too to be imposed.
Stock market speculation is both legit and aims to large capital gains, to compensate for the risk taken. Stock market manipulation and pump and dump trading schemes are illegal.
What is very important for the path of the US stock market now is that the Q4 earnings for the majority of companies have beat the estimates for EPS and revenues. This is too important and a key fundamental factor that is supportive of the recent all-time high levels for the stock indices. But this also means that plenty of stocks are now overvalued.
The Retail Sales were a big positive surprise with a figure of 5.3%, beating the consensus of 1.1%. The Building Permits were also strong coming in at 1.881 M, better than the forecast of 1.678 M. Still the Housing Starts were a miss, with a figure of 1.58 M, lower than the consensus of 1.658 M.
The labor market continues to struggle. Disappointing labor data the previous week was again a key economic metric to monitor. Continuing Jobless Claims came in at 4.494 M, higher than the consensus of 4.413 M, and Initial Jobless Claims came in at 861 K higher than the consensus of 765 K.
The major US stock market indexes closed as follows on Friday February 19, 2021:
• Dow Jones Industrial Average: Close 31494.32, +0.11% for the week, +2.90% Year-to-date (DIA)
• S&P 500 Index: Close 3906.71, -0.71% for the week, +4.01% Year-to-date (SPX)
• Nasdaq Composite Close 13874.46, -1.57% for the week, +7.65%, Year-to-date
• Russell 2000: Close 2266.69, -0.99% for the week, +14.78% Year-to-date (IWM)
Economic events for the week February 22- February 26, 2021:
Important economic data for the next week will be the weekly Initial and Continuing Jobless Claims, the Chicago Fed National Activity Index, the S&P/Case-Shiller Home Price Indices, New Home Sales, Durable Goods Orders, Gross Domestic Product Annualized(Q4) PREL, Personal Spending, Personal Income, and the Michigan Consumer Sentiment Index.