Weekly Market Update 04/10/2021

I hope you are enjoying this weather this week as Las Vegas is seen one of the few weeks per year we can rival our neighbors to the West when it comes to climate. 

In what was a rather quiet week, the markets continue to be optimistic when looking at the outlook of economic recovery.  Stocks again hit new record highs as the S&P 500 posted a 2% gain for the week¹. While this bull market is still quite young, there remains several key questions. While no market path is truly predictable, we do think there are key signposts that provide signals of progress.  Here are what we have felt are the key questions and some insight to where those signals have us potentially  headed:

• Continued improvement in the labor market should add fuel to the fire of the overall economy.
• The unemployment rate has fallen nearly 9% in the preceding 12 months.
• Consumer spending, which makes up roughly 70% of U.S. GDP, which with full employment will play a crucial role in this continued recovery.
• In the past 40 years, when a descending unemployment rate breached 6%, it continued to decline, on average, for another 50 months. Moreover, the average gain in the stock market over the next two years was 22.7%, reflecting the important influence an improving labor market has on a growing economy, and what a growing economy then means for equity-market performance. 

• With a move north in the 10-year treasury, the S&P's advantage in earnings yield has begun to narrow.
• While there is an open road for a bull recovery, volatility and a slightly slower pace than we have seen is likely.
• The earnings yield reached similar levels in January and October of 2018, followed by strong performance from the market in 2019.

• Fed rate hikes will play a larger role than corporate tax increases.
• President Biden's proposed $2 trillion infrastructure bill is the latest iteration of the fiscal-policy response, which would push pandemic fiscal stimulus above 30% of GDP, by far the largest in U.S. post-war history and well ahead of current levels among other global developed nations.

Here are the numbers for this week;

The S&P 500 (+2.7%) and Dow Jones Industrial Average (+2.0%) kicked off the week with a data-driven rally to new heights, followed by a mechanical grind higher the rest of the week. The Nasdaq Composite (+3.1%) outperformed with a 3% gain, while the Russell 2000 underperformed with a 0.5% decline. 

Ten of the 11 S&P 500 sectors ended the week in the green. None were more influential than the information technology (+4.7%) and consumer discretionary (+4.2%) sectors, which rose more than 4.0% amid strength in their mega-cap components. The energy sector (-4.1%) was the lone holdout with a sharp 4% decline, as investors took profits. 

On Monday, the market keyed off a strong employment report for March, which was released the prior Friday when the stock market was closed, and a record-setting ISM Non-Manufacturing Index for March. The data indicated that the economic recovery is gaining momentum. 

What's more, JPMorgan Chase (JPM) CEO Jamie Dimon said in an annual shareholder letter on Wednesday that an economic boom could easily run into 2023. Market reaction to this observation was muted, though, as the market was stuck in consolidation mode. Mr. Dimon also cautioned about the "not-unreasonable possibility that an increase in inflation will not be just temporary."

At the end of the week, the Producer Price Index increased a hotter-than-expected 1.0% m/m in March (Briefing.com consensus +0.5%), bringing its yr/yr increase to 4.2%. The market stood by the Fed's thinking that an increase in inflation would be transitory. 

Speaking of the Fed, the central bank's dovish monetary policy was reaffirmed in the FOMC Minutes from the March meeting and by Fed Chair Powell at an event hosted by the IMF this week. 

Underlying positive factors for the mega-cap/growth stocks included a recognition that long-term interest rates have cooled off this month, money continuing to reshuffle into these Q1 laggards, and investors possibly front running Q1 earnings reports. The 10-yr yield decreased four basis points to 1.67%. 

As always it is my pleasure to bring you this weekly update and if this or anything else is causing you pause or you would like further details, please feel free to reach out to me and we can schedule some time to chat. 

Justin J. Long CFP®
Founder/Lead Advisor
Diazo Wealth Group
702-745-1800 Direct
702-278-6560 Cell

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Source: 1. Morningstar Direct
Source: Week in perspective provided by Briefing.com. Briefing.com offers live market analysis on their web site www.Briefing.com.

Innovative Adviser Solutions, LLC, a registered investment adviser, dba Diazo Wealth