U.S. equity markets bounced back last week with the strongest weekly returns since November as the speculative trading frenzy in heavily shorted stocks from January began to subside. The broad market rally pushed higher despite a weaker than expected January jobs report, as market participants increased their focus on the potential for additional fiscal stimulus. For the week, the S&P 500 surged 4.7% to a new record high, while the Nasdaq Composite and Dow Jones gained 6.0% and 3.9%, respectively. Meanwhile, bond yields rose on growing inflation expectations and increasing risk appetite, with the 10-year Treasury yield pushing to its high on the year of 1.17%, putting more distance off last year’s low of 0.50%, and the 30-year pushing through 2.0% for the first time in almost a year.

 

The market seemed to take bad news as good news last week as a relatively poor employment report bolstered expectations of a larger government stimulus package getting approved near-term. On Friday, the Labor Department reported that the U.S. added just 49k jobs in January, which was below expectations for 100k new payrolls, and December’s numbers were revised significantly lower than initially reported by almost 100k. The U.S. economy lost roughly 9 million jobs on a net basis in 2020, which would take several years to recover at the pace of the past few months, though there are hopes that the pace may pick-up as coronavirus cases in the U.S. trend lower and the vaccine rollout gains steam. Additionally, the headline unemployment rate dropped from 6.7% to 6.3%, though this was more of a result of people dropping out of the labor force than due to job growth.

 

Despite moderating economic data, corporate earnings results continue to surpass expectations by a wide margin with the S&P 500 on track to record positive year-over-year growth for the first time since the last quarter of 2019. To date, about 60% of the constituents of the S&P 500 have reported fourth quarter earnings with the aggregate earnings growth up 4.5% over a year ago compared to expectations for earnings to be down -13% over the prior year coming into earnings season, according to FactSet.

 

In the week ahead, much of the focus will remain on corporate earnings with another 82 companies from the S&P 500 on the docket to report. On the economic front, investors will get an updated reading on inflation, which will be a key area of focus as the nation recovers from the pandemic. The Consumer Price Index is expected to show just a 1.5% increase year-over-year for January but investors will be monitoring inflation in coming months for upward pressure from recovering consumer demand aided by stimulus. A significant, sustainable rise in inflation poses a risk across financial markets if it forces the Federal Reserve’s hand in tightening liquidity by hiking rates or ending its bond purchase program. However, the Federal Reserve has indicated that they are likely to remain accommodative until the labor market has recovered to full employment and inflation is sustainably averaging 2.0%, not just temporarily heating up, before they consider becoming more restrictive with monetary policy.