U.S. equity markets slid lower last week amid a notable backup in long-term interest rates due to an improving economic outlook and growing expectation for more government debt issuance to fund stimulus and resulting upward pressure on inflation. Coronavirus cases, hospitalizations, and vaccine doses administered all continued to trend in an encouraging direction, which has bolstered growth expectations alongside last week’s very strong retail sales numbers. For the week, the S&P 500 and the tech-heavy Nasdaq Composite lost -0.7% and -1.5%, respectively, while the Dow Jones managed to stay positive with a 0.2% gain given greater exposure to economically-sensitive companies benefitting from improving sentiment toward recovery.
Rising interest rates and inflation expectations are front and center on the minds of market participants right now as the 10-year Treasury yield has risen to 1.36%, up 0.44% so far this year and well off of last year’s low of 0.50%. The backup in rates has caused some concern in equity markets, particularly for high growth stocks, where valuations have been stretched by ample liquidity and depressed bond yields that have made stocks more attractive. However, while rising rates could let some of the air out of pricey valuation multiples in areas of the stock market, it is not all bad news for equities broadly as rising rates and inflation expectations bode well for a pickup in economic and corporate earnings growth and improving investor sentiment, especially while the Federal Reserve remains accommodative with easy monetary policy.
Last week’s retail sales numbers for January blew the doors off relative to expectations and the dip in sales over the prior months. Retail sales grew 5.3% in January over December compared to the consensus forecast for just a 1.0% increase. Some of the strongest results were in furniture store sales (up 12.0%) and e-commerce (up 11.0%), as the $900 billion December stimulus injection gave U.S. consumers a boost after the holidays. Separately, the Producer Price Index (PPI) also came in above expectations, rising 1.3% in January or 1.7% year-over-year, as demand picks up and commodity prices recover from the economic shock from the pandemic.
In the week ahead, all eyes will be on Federal Reserve Chairman Jerome Powell as he is set to give a semiannual monetary policy testimony to Congress. The Fed is expected to remain accommodative, particularly as the labor market remains challenged with elevated unemployment. Elsewhere, a strong corporate earnings season will begin to wind down this week with just over 12% of members of the S&P 500 still left to report and the index on track for 3.2% year-over-year growth.
For additional perspectives on recent economic and market activity and a discussion on staying the course in times of change, we welcome you to join a live online event that we are hosting on Tuesday, March 2nd at 11 am EST. You should have received a separate email invitation titled “Perspective from Private Wealth” with the call details, but please reach out to your advisor with any questions that you may have for joining the event.