As a new month dawns it looks like investors are getting back to work in stocks. Worries about higher interest rates seem to be waning—for now, anyway—as the yield on the 10-year Treasury pulls back, allowing stocks to rally on vaccine and stimulus optimism.
The latest good news on the vaccine front came over the weekend with the Centers for Disease Control and Prevention greenlighting Johnson & Johnson's (NYSE:JNJ) single-dose COVID-19 vaccine for people 18 and older. That adds to the vaccines already being rolled out around the world, boosting hope for a return to some sort of economic normalcy if more people can get out and go to restaurants, malls and theaters.
On the stimulus front, the House passed a $1.9-trillion coronavirus relief package. Although the bill may get some adjustments in the Senate, it seems that investors are thinking some form of the bill will get passed.
The theme of vaccine and stimulus optimism has helped stocks to record highs in recent sessions. With the strong stock market and economic data coming in better-than-expected, some people might have been shuffling part of their portfolios out of equities in anticipation of more attractive yields in the bond market.
While the magnitude of the jump in yield over a relatively short period of time may have spooked the market, it’s perhaps not that surprising that interest rates have been on the rise along with concerns about potential inflation. After all, some inflation is seen as a good thing, and tends to go along with a healthy, expanding economy.
Rising rates do pose a competitive challenge to stocks, but with Treasury yields still low by historical standards there are still plenty of companies out there yielding a good bit more than the 10-year Treasury.
Tug Of War Continues
If higher rates are indicative of a stronger economy, that could bode well for cyclical stocks in the Energy, Industrials and Materials sectors that tend to do better in an up economy when commodities prices tend to rise. The Financials sector could also benefit from higher rates on the longer end of the curve as well as the greater lending activity that can come from a stronger economy.
While rising oil prices wouldn’t be welcomed by airlines, the environment of increased demand for oil might also coincide with more demand for travel, which could help the beaten down airline industry gain some altitude.
Still, it’s early days, and the reopening trade still seems to have competition from big tech-related firms that have offered some protection for investors during the pandemic, even if they might not have the same allure as a few months ago. And the stay-at-home trade seems like it still has some legs to it as the vaccine rollout is far from complete and governments remain cautious about letting their guard down. The tech-heavy Nasdaq Composite finished Friday higher even as the other two main U.S. indices ended in the red.
Mark Your Calendar
Later this morning, the market is scheduled to get the February ISM manufacturing index, which according to a Briefing.com consensus is expected to come in at 58.8%, a slight improvement over the previous month’s reading. We’ll also get the January construction spending report.
On Thursday, the initial jobless claims report is expected to show 725,000 more unemployed people, according to a Briefing.com consensus. That would be a slight improvement over the previous week’s 730,000, which marked an encouraging drop from the prior week’s figure. Factory orders are also due out on Thursday.
Friday holds one of the biggest economic reports, in the form of the government’s non-farm payrolls numbers. In February, the economy is expected to have added 200,000 jobs, according to a Briefing.com consensus. That would be a much better showing than the previous month’s 49,000.
Turning to earnings this week, we might get to hear more on the vaccine front from Novavax (NASDAQ:NVAX) executives in comments accompanying the company’s earnings report. Zoom Video (NASDAQ:ZM) also opens its books, and it could be interesting to see how one of the bellwethers of the stay-at-home trade has been doing as the re-opening trade has gained steam. And as the global semiconductor shortage continues, commentary from Broadcom (NASDAQ:AVGO) executives could be of particular interest for investors in the chipmaking space.
Turning to retailers, earnings reports are expected this week from Target (NYSE:TGT), Ross Stores (NASDAQ:ROST), Kohls (NYSE:KSS), Dollar Tree (NASDAQ:DLTR) and Gap (NYSE:GPS). It could be interesting to see more on how these companies have been doing with online sales but also what they’re seeing in terms of actual foot traffic.
With all the worries about inflation swirling around, it could be interesting to see whether Consumer Staples sector executives have comments about whether they’re seeing rising costs in consumer goods. Costco (NASDAQ:COST), Kroger (NYSE:KR), and Campbell Soup (NYSE:CPB) are scheduled to report earnings this week.
CHART OF THE DAY: INFLATION AND FEAR INDICES. The Treasury market captured attention last week as the yield on the 10-year Treasury surged. The higher yield provided more competition for stocks and stoked fears about inflation. The market’s main fear gauge, the Cboe Volatility Index (VIX-purple line) also ratcheted up along with the 10-Year Treasury Note Yield Index (TNX-candlestick). A pullback in the yield on Friday helped calm nerves somewhat, but the yield remains well elevated from where it was earlier in the year. Data source: Cboe Global Markets (NYSE:CBOE). Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Higher Times Ahead? While the results of elections in November have been a powerful tailwind for the legal cannabis industry, it’s not only changing political thinking that seems to be behind the industry. Industry information provider New Cannabis Ventures said in its Sunday newsletter that it expects that the fourth quarter was another solid one of strong revenue growth and improving profitability for the financial performance of the largest multi-state operators. “Cannabis stocks have performed quite well in 2021 thus far, but this has been due primarily to political developments,” New Cannabis Ventures said. “We see Q4 earnings reports as a catalyst especially for MSOs, as investors are likely once again to be reminded of how robust industry growth is currently.”
Earnings Outlook Brightens: Turning to the next earnings season for the broader market, there have been quite a few analysts increasing their earnings estimates for companies in the S&P 500 Index for the first quarter. During the first two months of this quarter, an aggregation of median first quarter earnings per share estimates for all the SPX companies increased by 5%, according to FactSet. That marks the second highest increase in the bottom-up EPS estimate during the first two months of a quarter since the financial data provider began tracking the metric in the second quarter of 2002. Of course, analysts chopped their earnings per share estimates for the first quarter of 2021 last year. Still, the upward revisions are a welcome sign of improvement.
Technically Speaking: Although Friday was a down day for the SPX, there did seem to be some reason for optimism from the key market barometer. After falling below its 50-day moving average of 3808, enough investors apparently decided to buy on the dip thinking that the index didn’t stay below that level. “The ability to attract buyers below the key technical level was viewed as an encouraging sign for bullish investors, although follow-through buying was meek and sellers regained control of the market into the close,” according to Briefing.com. Still, SPX closed above that 3808 mark.