Daily Market Notes: 4-16-2021

Another day, another dollar as this astounding record-setting rally rolled right along yesterday as encouraged by some better economic reports and a sharp decline in bond yields, both the Dow and S&P closed higher than they have ever been while the Nasdaq is now less than 1% away from its best ever close.

The Dow opened higher and basically just kept going and going with a little late upside acceleration to put the icing on the bullish cake, so to speak. As a result, it ended with a 305 point gain to 34,036, the first time that this round number had been attained. It was led in the process by a huge gain in UNH after its earnings and since this is the highest priced stock in the price-weighted Dow index, it upside influence was huge. Other contributing to the advance were GS naturally on an up-day, MSFT and AMGN, so it was healthcare that was the star of the day.

The S&P also opened higher and never looked back, as it skyrocketed to its best ever level as well with a 45 point advance to 4170. It was helped once again by gains in the large-cap tech stocks which were helped by a very large decline in interest rates with the 10-year Note down to 1.55% from its high of 1.75% a few weeks ago. This decline is in sharp contrast to all of the interest rate so-called “experts” who have been falling all over each other to confidently tell us when this level will reach between 2 to 2.5%.

The Nasdaq really wants to join the all-time high club as it now is less than 1% from its best ever level but the Nasdaq 100 has already reached that mark because of its reliance on the large-cap technology issues which have really caught fire lately with both GOOG and MSFT reaching all-time highs as well.

The Russell 2000 Index of small stocks did nothing and just sort of got dragged higher after being slightly lower all day and ended with a nominal 9 point advance to 2257. And how about the VIX, which continues to slide lower and reached 16.57 but unlike the old days, when it would plunge on large higher days like this one, it has only reluctantly gone lower during this record-setting advance and the reason for this is the tremendous amount of call buying in options by those who believe, with some justification, that the market is so overbought at current levels that some sort of setback is inevitable.

The rally came as investors welcomed a suite of encouraging economic reports showing how hungry Americans are to spend again, how fewer workers are losing their jobs and how much fatter corporate profits are getting.

Expectations are very high on Wall Street that the economy, and thus corporate profits, are in the midst of exploding out of the cavern created by the pandemic, thanks to COVID-19 vaccinations and massive support from the U.S. government and Federal Reserve. New data on retail sales and jobless claims helped bolster the view that the economic recovery is accelerating.

As mentioned above, the rally got off to a swift start as investors were welcomed by some better economic reports, the first of which showed that retail sales jumped by 9.8% in March from February, blowing past economists’ forecasts for 5.5% growth. Much of the surge was due to $1,400 payments from the U.S. government’s latest economic rescue effort hitting households’ bank accounts. Economists said it shows how primed people are to spend as the economy reopens and conditions brighten. This is important in an economy where consumer spending accounts for two-thirds of its growth.

Weekly jobless claims declined to their lowest level since the start of the pandemic, with 576,000 people applying for unemployment benefits last week and down from 769,000 the prior week.

Adding to the optimism, more big U.S. companies reported even healthier profits for the first three months of 2021 than analysts had forecast. Expectations are already high for this earnings reporting season, which could result in the strongest growth in more than a decade as of the 34 S&P companies that have reported, 88% have beaten their estimates by a large average of 22%.

With growth expectations so high, some investors are worried about the possibility that inflation could swing upward. If it were to sustain itself, high inflation could send bond prices tumbling, hurt corporate profit margins and trigger volatility across markets worldwide. Despite these inflation concerns, yields dropped dramatically as mentioned above, go figure.

The pullback in yields echoes what happened earlier this week, when the C.P.I. index came in higher than expected. It would have made sense if the stronger than expected inflation report had caused investors to sell bonds and send yields higher, but they largely shrugged it off.

Analysts still expect bond yields to tick higher as the year goes on and the economy continues recovering, along with investors shifting money into sectors that will see a greater benefit from the recovery.

The surprising reaction may be a result of how unpredictable data can be as the pandemic and government efforts to counteract it distort everything. And, for now at least, the numbers seem to be pointing toward more strength.

The falling yields helped send some financial stocks to some of the market’s sharpest losses, because lower long-term interest rates limit the profits banks make from lending. Both BAC and C declined even though both had earlier in the day reported stronger profits for the first three months of 2021 than expected. This is an example of how the market could be already discounting good earnings results by the large advances that some companies have achieved lately. But on the other hand, some stocks like GS and UNH have made large upside further gains after their results, so it will probably be a company by company situation as we move deeper into the earnings season.

Profits for the first-quarter are now expected to grow by 24%, which would be the best one in more than a decade, compared with the view back in September that companies in the S&P would see 13% earnings growth.

The lineup is as follows: yesterday – BLK, SCHW, PEP, USB, RAD higher and BAC, C and DAL lower; today  – AA, BNY, KSU, MS, PNC, STT are higher.

Economic reports will have: yesterday – weekly jobless claims declined to a post-COVID low of 576,00 but last week was revised higher, advance March retail sales rose by 9.8% and ex-autos were 8.4% higher, April NY State Empire Manufacturing survey was up to 26.3, the highest in five years, April Philadelphia Fed Manufacturing Survey gained to 50.2, one of the highest levels ever, April NAHB Housing Market Index rose to 82, March industrial production rose by 1.4% while capacity utilization increased to 74.4% which is 5 points below the long-term average; today – March housing starts jumped by 19.4% and building permits rose by 2.7%, mid-month U. of Michigan Consumer Sentiment Survey slipped to 86.5.

Donald M. Selkin

Chief Market Strategist

 

Disclosures:

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.