Week Ending April 23rd, 2021

Markets paused and  took a breather this week before coming back on Friday. Biden's plan to raise capital gains tax for the wealthy did not create the panic as one would had hoped for. Major stock indices were only down by 1% roughly on Thursday after news about capital gains tax hike flashed. I think this little pause represents a healthy small pullback, as stocks don’t go up in a straight upward sloping line.

I have been hoping for a deeper pullback, somewhat close to 10% as the current valuations represent much more than the discounted future good news. There is frothiness in all sectors,  of course in unequal proportions in my view. I think 10-20% correction is needed to clear the frothiness. I think Markets are waiting for a catalyst to correct and then resume their upward journey.

The scientists should come up with a better explanation about the cause of mutations in the coronavirus apart from text book explanations which refer to "mistakes which occur naturally when virus replicates". The double mutation strain has caused a lot of havoc in Asia and I expect pharmaceutical companies to come up with new booster shots every 3-4 months to tackle new strains. The world economy is still shackled by the coronavirus and  I think the goal of complete eradication is shifting away with discoveries of new killer strains. The shifting of the goal post will keep on hampering the business confidence  around the world. Being a student of Human Genetics in my undergraduate years, I think if we vaccinate almost entire population of the world  with vaccines containing inactive coronavirus (Pfizer & Moderna) somehow, virus will have far less chance to replicate and make more deadly strains.

Weekly jobless claims fell to a new low of 547,000 in the week ended on April 17th as per latest DOL's release this week while National Association of Realtors reported that existing home sales fell 3.7% in March from February amid limited supply of houses. The flash reading of US composite PMI rose to a record high of 62.2 in April from 59.7 in March as per IHS Markit's data release on Friday.

It has to be seen what Fed says next week on Wednesday apart from presenting the obvious rosy economic picture ahead. It's clear enough that Fed won't be providing any clue about any future policy change next week.

Week Ending April 16th, 2021

I wrote my weekly piece titled as "Good News is No News" at the start of April. I thought everything was priced into the market and I still think good news is no news for sophisticated investors. The good economic numbers released last week were all close to expectations  and some exceeded expectations. But did not we know about this happening as it always happens in the start of any economic expansion. One should expect better economic numbers in the near future if coronavirus remains contained somehow. I am only trying to say that the present valuations are way ahead of the economic reality even if we discount the expected future growth.

Last week stocks moved to new highs powered by 9.8% jump in retail sales in March, weekly jobless claims fell to a new low of 576,000, and the banks reported better numbers. The core CPI data released last week showed a modest increase of 0.3% in March. The  major banks reported better than consensus results although loan growth dimmed.

More good news on the economic front is expected in the remaining months of the year but one should not expect stocks to continue to move higher in direct proportion to the magnitude of future good news. Investors should think about protecting the gains while participating in the stocks rally. 

Week Ending April 9th, 2021

Contrary to my expectations, last week was good for the stocks. Major stock indices steadily moved higher after better than expected March’s jobs report . Nasdaq composite index outperformed SP500 last week which was quite interesting and unexpected move for me.

On Friday, Bureau of Labor Statistics reported that Producer Price Index increased by 1% in March on seasonally adjusted basis, which is higher than expectations. The core prices for final demand rose 0.6% in March following an increase of 0.2% in February.

The 10 year US Treasury yield continued its descent last week but increased to 1.66 % on Friday after release of Producer Price data.

I continue to hold on to my thesis that it is not an open road ahead kind of scenario for the stocks although economic data is pointing towards much brighter days ahead for the economy. I think the better data will prompt the Fed to change tone of the communication before its being expected although Fed plans to let the economy run a little hot before it plans to change its stance. Moreover I think that the stock prices have run ahead of the earnings growth over the last one year. I advise investors to stay invested and buy some kind of protection for the unexpected.

Major Banks will be releasing quarterly results this week. Moreover the Consumer price data, retail sales data will also be released this week for March 2021,which will provide more clarity on where things stand. 

Week Ending April 2nd, 2021

The major stocks benchmarks closed higher for the shortened week. The large cap SP500 Index crossed  psychological 4000 threshold level. As reported on Thursday, seasonally adjusted initial jobless claims were 719,000 in the week ended on March 27, an increase of 61000 from the previous week's revised level which kind of helped stocks on Thursday.

On Friday, the non-farm payroll report showed that 916,000 jobs were added in March, which was an upside surprise for me and many others. And the unemployment rate edged down to 6.0% in March. The Participation rate remained little changed at 61.5% in March which is 1.8 percentage points lower than February 2020 level. It has to be noted that data for March report was collected earlier in the month before most states broadened vaccine access.

I have been trying to draw some lessons from the last summer's market action. The pandemic was in full swing and all the economic data releases were pointing towards very weak economic situation. The only good news which propelled the stocks in my view was the Fed's backstop. And everybody knows what happened later, stocks have reached all-time highs since then.

Now we have good vaccines and treatment options available, the new infection rate is very low, employment situation is much better, infrastructure boom is on the horizon, etc. I think all the good news has already been priced into the market and more better news will add more to the inflation, higher interest rate fears. I think that stocks won't be performing to the tune of good news in the remaining months of this year. The stocks would trade sideways if not downward or we will have periodic quick pullbacks now onwards in my view.

The long term yields have been rising and I expect yields to move higher in the coming months. If the economy can put together more months like this March in terms of  jobs report, I think Fed will be left with no excuse to maintain its current stance.  Moreover I think Philip's curve is not dead, and chances of higher inflation are much higher given the amount of liquidity in the system, fiscal measures and the pent up demand. 

Week Ending March 26th, 2021

The major stock indices were mixed last week . The investors seem to be thinking about re-opening expectations and inflation concerns. The seasonally adjusted initial jobless claims fell to 684,000 in the week ending on March 20. A decrease of 97,000 from the revised level of the week ended on March 13, while existing home sales and new home sales fell 6.6% and 18.2 % respectively for the month of February.

On last Thursday, President Biden announced his aim of vaccinating 200 million Americans in his first 100 days instead of 100 million as previously targeted by him. The university of Michigan's sentiment index rose to final reading of 84.9 this month as reported last Friday from February's reading of 76.8. This recent rise has the brought the index to its highest level since March 2020.

The US employment situation for March is scheduled to be released on April 2nd, this coming Friday. And the investors will have couple of days to react to this new information as markets are closed on Friday in observance of  Good Friday. While the economic situation expectations continue to brighten, I think investors should wait for the right opportunities as stocks are expected to have  periodic pullbacks in my view due to rising inflation, interest rate worries. Moreover Biden administration is mulling over huge infrastructure plans, which are expected to be unveiled as early as this coming week. The infrastructure plans would further put upward pressure on already rising long term yields.

Week Ending March 19th, 2021

The major stock indices continued to march higher earlier in the week but later lost ground as bond yields touched highest levels in over a year. The most watched 10 Year Treasury yield touched 1.75% in the week and was at 1.73% as of Friday's close.

Fed is trying hard to walk a tight rope, it changed its projections of inflation, unemployment and GDP by a lot in the meeting last week. Mr. Powell tried to calm investors with ultra-dovish remarks after the meeting ended. Fed moved its projection of headline PCE inflation up from 1.8% to 2.4 %  while raising core PCE projection to 2.2% for the current year.

I think what will happen if the long term yields continue to rise amid Fed's assurances, and it may cause the Fed to change its monetary stance earlier than being projected. The fed is forecasting  inflation bump as a temporary one but who knows if it happens to be otherwise in the backdrop of highly liquid conditions and expected sharp rise in GDP growth. Although we know inflation barely touched Fed's target in 2019 after years of ultra-accommodative policy.

US - China meeting ended with no progress on any of the issues between the two. I personally feel that China seems to be unstoppable, and poses a threat to the world order in the years to come.

The seasonally adjusted initial jobless claims rose to 770,000 in the week ended on March 13th; an increase of 45,000 from previous week's revised level. And the total industrial production decreased by 2.2% from January's revised level. 

Week Ending March 12th, 2021

The stock market touched new highs last week as economic outlook prospects continue to brighten. The $1.9 trillion stimulus bill became a reality last week. Roughly $400 Billion will be sent to consumers in the form of checks up to $1400 in the coming week. This $400 billion won't be spent by people immediately but over the course of the time in near future and this will definitely boost the economic expansion temporarily.

The stocks breathed a sigh of relief after long term yields backed off a little for the first few days of last week. Moreover inflation data released last week showed no signs of any upside surprise. On last Wednesday labor department reported that CPI index, less food and energy, rose only by 0.1% in February. The core producer price index moved up 0.2% in February as per Friday's release by the Bureau of Labor Statistics.

The seasonally adjusted initial jobless claims were 712,000 in the week ended on March 6th, a decrease of 42,000 from the previous week's revised level. Almost everything is priced in it seems, the only way forward which will strengthen the legs of this economic expansion will be jobs & jobs growth. 

Week Ending March 5th, 2021

Major stock indices recovered on Last Friday, Nasdaq composite ended the week down 2% on weekly basis. The rising long term yields continued to haunt the tech stocks as the rising yields affect the present value of the future growth associated with the tech sector. In other words tech stocks can also be stated as "long duration assets" as future growth expectations and long term earning power drive the interest of the investors. And whenever the rates rise, the long duration assets decline in value to compensate for the rising interest rates.

I think stock market will have periodic pull backs going forward as the investors try to process the signals more accurately coming from the Fed. The 10 year Treasury yield climbed to 1.54% after Mr. Powell spoke last week. Investors are thinking in their minds that if the 10 Year Treasury yield rises to let's say 1.75%-2% within coming few weeks, it will change the tone of the Fed's communication. Although Powell told us last week that fed is not monitoring only one data set. But he said if the rising yields cause financial conditions to tighten, and if things change materially; Fed will make use of tools in appropriate way.

Senate has passed the $1.9 Trillion stimulus bill yesterday, and the House will vote on the amended version by Tuesday. The headline number associated with the new bill passed by the Senate will put more upward pressure on the yields in my view.

The nonfarm payroll employment rose by 379,000 in February as reported last Friday. The most of the job gains occurred in leisure and hospitality sector in February. The initial jobless claims were 745,000 in the week ended on February 27th on seasonally adjusted basis . 

Week Ending February 26th, 2021

The major stock indices pulled back last week after investors started taking rising long term yields more seriously. Fed Chair Jerome Powell tried to calm the investors' nerves last week by emphasizing that inflation remains soft and is not being expected to rise sharply and show persistent increases later this year. But the markets continued to fall again after last Wednesday. I think one needs to understand that long term yields are rising as the prospects of economic growth has increased and PPI data released last week showed the signs of inflation.

I think investors need to understand that yield curve is steepening not flattening. Flattening of the yield curve is expected after multi-year expansion when rise in inflation is expected to change monetary policy's stance, which in turn cause the short end of the curve to rise. This time inflations needs to remain above 2% for quite some time before Fed considers any change in policy. The sudden or short lived  bump in inflation won't be enough for the Fed to reconsider its plans.

I personally believe the persistent rise in inflation is dependent more on the labor strength. We are nowhere near the levels seen before pandemic in term of the unemployment numbers. The accommodative  monetary policy and the fiscal stimulus plans continue to support the stocks in general.

Fears of rise in inflation were also fed by the sudden fall in initial jobless claims and rise in personal Income data released last week. Weekly Jobless claims hit 730,000 on seasonally adjusted basis, the lowest since last 3 months as reported last week. The  estimates of Personal Income, Disposable Personal Income rose by 10.0% and 11.4% in January respectively as reported last Friday.

I think rising yield will be a headwind for high growth tech stocks in the short term but there are subsets of the tech stocks which will benefit more from the economic growth. For the short term, Markets need a correction as valuations are very stretched and most of the good news has already been priced in the market. 

Week Ending February 19th, 2021

SP500 & Dow were almost flat last week while technology heavy Nasdaq ended the week in red. One of the major highlights of the week was the congressional hearing of the parties involved in the GameStop saga. I think it was a good effort by the congressional committee but I think it failed to address the core issues like full disclosures to public at large and protocols being followed by the trading apps before granting permission to trade derivatives and other complex instruments.

10 year Treasury yield rose to 1.34%  which is catching lot of attention due to reasons behind the upward move since start of the year and the implications of the rise in yields for the market overall. I do believe the rising yields and the inflation fear will put breaks on the high flying stock market.

Minutes of the Fed meeting last month were released last Wednesday which showed that the policy makers viewed economic conditions as being far from the fed's long term goals. On coming Tuesday Mr. Powell is set to testify before congressional panel.

It was reported last week that initial jobless claims rose unexpectedly to 861000 on seasonally adjusted basis in the week ending on February 13. Also the producer price index increased 1.3% in January, which is highest since 2009 as reported by the bureau of labor statistics last week. Advanced estimates of retail sales were $568.2 billion in January an increase of 5.3% on monthly basis as reported by the census bureau last week. Rising retail sales and producer price index add to the inflation fears.

I think it's high time for investors to reconsider their future expectations from the market in general. And I advise people not to follow  the online forums and buy stocks based on rumors.