Pent Up Exuberance

Pent up exuberance.  Stocks raced higher yesterday in a delayed response to last Friday’s encouraging employment report. Strong services PMIs pointed to further recovery and less-active bond yields gave tech shares a chance to regain ground.

N O T E W O R T H Y

That’s a market.  It was a good, Good Friday for the US economy. A strong jobs number served as further proof that the economy is on the mends after spending much of the past year limping along.  Purchase managers’ indexes (PMIs) have pointed to significant growth in manufacturing, not rivaled since the early 1980s.  Manufacturing has been rapidly expanding to meet pent-up demand, catching up from the leaner, pandemic months.  Economists are increasingly revising GDP growth figures upward as more Americans receive their vaccinations and states increasingly cut back on restrictions.  The ongoing recovery is not necessarily news, as many of us can see the palpable change in traffic patterns on the roads, retail establishments, and yes, even some restaurants.  The markets have certainly factored in a recovery, led by economically sensitive and beaten down value stocks.  And yes, bond yields have risen in anticipation of the higher inflation which will be caused by a surge in demand for goods and services.  Generally speaking, markets place their bets on where “things” will be in the future. Sometimes, the conviction is so strong that it can get confusing. Last April, as stock markets began to recover from the prior month’s selloff, many were left wondering how stocks could rally while we were in our darkest pandemic days.  My 1.5 – 2 hour commute had been reduced to just 40 minutes, restaurants were closed, airplanes were parked on tarmacs, companies were scrambling to raise capital to make up for revenue shortfalls, and manufacturing ground to a halt.  There was hardly a sign of when the bleeding would end, so how was it that stocks could be rallying?  Because stock prices were factoring in a better future. Ok, great, so we got that.  Markets place bets on the future and then they await proof.  Those bets from the darkest days of 2020 got their first proof when Moderna and Pfizer announced the success of their vaccine trials in November. That proof sparked the next wave of bets on the future and this time, the bet would be economic recovery.  Recovery meant that stocks which were economically sensitive and those which were solid but underpriced would see better days in the future.  A noticeable shift occurred into those stocks as value, small caps, and cyclicals significantly outperformed the large and mega cap growth stocks that had dominated the first leg of the market turnaround. Then, as in mid-2020… it was time to await proof.  That would trickle in as the number of vaccinations began to grow, but it was still not enough. There are still millions of unemployed as a result of the pandemic, therefore a recovery in labor would be a crucial sign of a recovery.  Last Friday’s employment figure was the first bit of solid proof that positive changes are afoot.  The Bureau of Labor Statistics reported that 916k new non-farm jobs were added last month, far exceeding economist estimates.  Digging into the numbers, you want to give a guess at where the most jobs were added?  Don’t stress, I will tell you.  The most notable gains came in Accommodation/Food Services, Leisure/Hospitality, and Educational Services, those areas which were hit hardest under pandemic restrictions.I bet you would have guessed that.  In any case we now have some more proof that things are headed in a positive direction, though we are far from being fully recovered. What are the next big market bets awaiting proof?  One, which has been in the news recently, is infrastructure.  There has been a lot of hope placed on a massive infrastructure overhaul and the Government seems poised to finally hammer something out. Bets have been placed on massive public works spending in anticipation of an infrastructure bill.  The Administration announced a $2.1 trillion infrastructure proposal last week which was good news for those market bets, but real proof will come once Congress takes up the debate, which has already started with the pre-negotiation rhetorical jabs in the media.  Until those differences are worked out, Industrials, Materials, renewables, etc. are likely to bounce around with the ups and downs of the negotiation.  Next week will mark the official, unofficial start to Q1 earnings season.  Though earnings were solid in Q4, investors will be looking for some solid proof of green shoots in the upcoming releases.  Should those releases provide further proof of recovery, what might be the next big bet markets undertake?  Don’t worry those positions are already being taken in the Fed Funds futures markets where traders are attempting to predict when the Fed will start to raise rates to slow down the growth… and beyond. That’s a market.  

THE MARKETS

Stocks rallied yesterday in delayed response to Friday’s strong employment numbers along with solid services PMIs released yesterday.  The S&P500 climbed by +1.44%, the Dow Jones Industrial Average rose by +1.13%, the Russell 2000 Index added +0.49%, and the Nasdaq Composite Index advanced by +1.67%.  Bonds rose and 10-year treasury yields eased by -2 basis points to 1.70%.  Crude oil futures pulled back by -4.56% on the possibility of supply increases due to increased production and possibility of a renewed nuclear deal with Iran.  The drop in crude prices caused the energy sector to pull back by -2.41%.

NXT UP

– JOLTS Job Openings (Feb) is expected to show 6.9 million openings, down slightly from January’s 6.917 vacancies.

– Richmond Fed President Thomas Barkin will speak today.

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