S&P 500 and Nasdaq Kick Off the Summer with New Record Highs

Each of the major indices bounced back from last week's losses and rose more than 2.0% this week, showcasing that the buy-the-dip strategy was still alive and well. The S&P 500 (+2.7%) and Nasdaq Composite (+2.4%) set all-time intraday and closing record highs while the Dow Jones Industrial Average (+3.4%) and Russell 2000 (+4.3%) outperformed with strong gains.

All 11 S&P 500 sectors contributed to the record-setting advance, including the energy (+6.7%), financials (+5.3%), and industrials (+3.0%) sectors atop the sector standings after a trio of pitiful performances last week. The utilities sector (+0.7%) underperformed on a relative basis.

There were many developments this week that supported the bullish action:

• The S&P 500 reclaimed its 50-day moving average (4193) on Monday, which really set the tone for the rest of the week given that this key technical level has rewarded buyers over the past 14 months.

• Fed Chair Powell said on Tuesday the central bank isn't going to raise rates preemptively because there are fears of inflation and said he expects strong jobs growth in the fall.

• The White House unveiled a $1.2 trillion "Bipartisan Infrastructure Framework" on Thursday that included $579 billion in new spending.

• 23 large banks easily passed the Fed's latest stress test on Thursday, raising expectations for increased share buybacks and dividends.

• The FDA granted Breakthrough Therapy designation for Eli Lilly's (LLY) investigational antibody therapy for Alzheimer's disease. Nike (NKE) jumped 15% on Friday following its earnings report.

The stock market overlooked a weaker-than-expected new home sales report for May and grew patience for the labor market to improve and inflation rates to peak. The core-PCE Price Index for May rose 0.5% m/m (Briefing.com consensus 0.6%), leaving it up 3.4% yr/yr. Weekly initial jobless claims (411,000) stayed above 400,000 for the second straight week.

Elsewhere, the 10-yr yield rose nine basis points to 1.54% while the 2-yr yield increased one basis point to 0.27%. This curve-steepening activity provided additional fuel for the bank stocks.

REFLATION NARRATIVE REPRICED AS FED STRIKES LESS DOVISH TONE

The S&P 500 (-1.9%) And Nasdaq Composite (-0.3%) Started The Week At Record Highs, But The Benchmark Index Ended The Week Down 2% As Value/Cyclical Stocks Sold Off After The Fed's Policy Meeting.

The Dow Jones Industrial Average (-3.5%) and Russell 2000 (-4.2%) succumbed to heavy losses of 3.5% and 4%, respectively.

From a sector perspective, the financials (-6.2%), materials (-6.3%), energy (-5.2%), and industrials (-3.8%) sectors dropped between 3-6%, while the information technology sector (+0.1%) managed to eke out a positive finish.

The FOMC made no changes to the fed funds rate or the pace of asset purchases, as expected, but the median forecast for the path of interest rates signaled two rate hikes by the end of 2023 -- the prior indication was leaving rates unchanged through 2023. Seven members expected a rate hike in 2022.

What's more, the Fed increased the interest on excess reserves to 0.15% from 0.10%, and the reverse repurchase rate was increased by five basis points to 0.05%.

Fed Chair Powell struck an accommodative tone following the FOMC policy statement, but St. Louis Fed President Bullard (FOMC voter in 2022), who was often seen as one of the more dovish Fed members, sounded more hawkish in a CNBC interview. Mr. Bullard said he was one of those seven officials who forecast a rate hike next year and said the Fed shouldn't be involved in mortgage-backed securities.

To be clear, the central bank acknowledged the rising inflation pressures in the economy, most evident this week in the hotter-than-expected Producer Price Index for May, but it remained assured that inflation will moderate and reach the Fed's longer-term goals.

In theory, raising rates modestly would help dampen inflation pressures without being overly restrictive for economic growth. The Fed also said it will provide advanced notice before announcing any decision to make changes to asset purchases.

The downside, though, was that the messaging from the Fed supported the burgeoning view that inflation rates, and growth rates, are peaking as the immediate effects from reopening the economy wear off.

The 10-yr yield decreased one basis point to 1.45%, respecting the Fed's view on transitory inflation factors, while the fed-funds-sensitive 2-yr yield jumped 11 basis points to 1.27%. The U.S. Dollar Index rose 2.0% to 92.32.

The unwind of the reflation narrative was further pressured by a series of other developments: commodities, ex oil, continued to pull back (copper futures dropped 9%); retail sales for May were weaker than expected; weekly initial claims unexpectedly increased; and JPMorgan Chase (JPM) and Citigroup (C) warned of lower trading revenue for the second quarter.

June Begins on Strong Note

The Stock Market Ended The First Week Of June On A Higher Note With The Dow, S&P 500, And Nasdaq Advancing A Respective 0.7%, 0.6%, And 0.5%.

The first half of the abbreviated week was very quiet, as the S&P 500 shed two points on Tuesday and gained six on Wednesday. That masked a strong start from the energy sector, which gained 6.7% during the week, extending its year-to-date advance to 45.3%. The sector benefited from a 5.0% rally in the price of oil, which climbed to $69.61/bbl, its highest level since mid‐October 2018.

Growth stocks showed some weakness on Thursday, pressuring sectors like technology, communication services, and consumer discretionary. However, they bounced on Friday as Treasury yields fell in response to a weaker than expected Employment Situation report for May. Technology and communication services gained a respective 1.2% and 0.6% for the week while the consumer discretionary sector lost 1.0%.

The past week saw renewed volatility in stocks that made headlines earlier this year. AMC (AMC) surged 95.2% on Wednesday and gained 83.4% for the week while GameStop (GME) and Bed Bath & Beyond (BBBY) gained a respective 11.9% and 13.3% for the week.

On the news front, the G-7 neared an agreement on a 15% global minimum corporate tax while the Biden administration negotiated the terms of an infrastructure spending package with Republicans. The administration also signaled openness to implementing a minimum corporate tax rate of 15% instead of raising the top rate to 28% from 21%.

GOOD PERFORMANCE FROM NOT ONLY STOCKS BUT ALSO BONDS

The Stock Market Had All‐Around Good Performance From The Large‐Caps, Mid‐Caps, Small‐Caps, And Even The Micro‐Caps. Risk Assets Appeared To Draw Support From The Calmness Of The Treasury Market, Which Staved Off Pestering Inflation Concerns And Accompanying Valuation Concerns.

The Nasdaq Composite (+2.1%), Russell 2000 (+2.4%), and iShares Micro‐Cap ETF (IWC, +3.3%) rose more than 2.0%. The S&P 500 (+1.2%), Dow Jones Industrial Average (+0.9%), and S&P Mid Cap 400 (+1.4%) each advanced closer to 1.0%.

From a sector perspective, the consumer discretionary (+2.2%), communication services (+2.5%), information technology (+1.6%), and real estate (+2.1%) sectors finished atop the leaderboard. Conversely, the utilities (‐1.6%), health care (‐0.7%), consumer staples (‐0.4%), and energy (‐0.02%) sectors closed lower.

Highlighting some of the economic data, which should help explain the relative strength in the Treasury market (the 10‐yr yield declined five basis points to 1.58%):

• New home sales declined 5.9% m/m in April to a seasonally adjusted annual rate of 863,000 (Briefing.com consensus 980,000)

• The Conference Board's Consumer Confidence Index dip 0.3 points to 117.2 in May (Briefing.com consensus 118.0)

• Durable Goods Orders unexpectedly decreased 1.3% m/m in April (Briefing.com consensus +0.8%)

• Personal income declined 13.1% m/m in April (Briefing.com consensus ‐15.0%), as the total of stimulus payments made was greatly reduced from March.

The data supported the thesis that economic growth rates are peaking, which in turn would suggest inflation rates are also peaking. The latter was corroborated by longer‐dated Treasury yields moving lower (not higher) to the following inflation news:

• The PCE Price Index ‐‐ the Fed's preferred inflation gauge ‐‐ was up 3.6% yr/yr in April

• The expected year‐ahead inflation rate was a record 4.6% in the final May reading for the University of Michigan Index of Consumer Sentiment

• Costco's (COST) CFO said, "inflationary factors abound" and estimated that overall price inflation at the selling level is in the 2.5‐3.5% range, or above prior expectations.

The question that remains is will inflation really be as transient as the Fed expects, especially when additional fiscal stimulus appears to be on the horizon? Senate Republicans confirmed a $928 billion infrastructure counteroffer to the Biden administration's $1.7 trillion American Jobs Plan while the White House confirmed a $6 trillion budget for FY22, which would include both the American Jobs Plan and American Families Plan.

The Treasury market thinks so.

NASDAQ ESCAPES WITH A WEEKLY GAIN, ITS FIRST IN FIVE WEEKS

This Week Featured A Lot Of Churn And Rotation Between Growth And Value Stocks, Which Made For A Lackluster Performance At The Index Level. The Nasdaq Composite (+0.3%) Rose Modestly, While The S&P 500 (-0.4%), Dow Jones Industrial Average (-0.5%), And Russell 2000 (-0.4%) Ended With Modest Losses.

The market appeared to adhere to the "peak growth" narrative this week after April housing starts, April existing home sales, and the Philadelphia Fed Index for May all decelerated on a month-over-basis basis. To be fair, preliminary data out of the IHS did show manufacturing and service-sector activity accelerate in May.

Accordingly, the cyclical S&P 500 energy (-2.8%), industrials (-1.7%), financials (-0.9%), materials (-1.4%), and consumer discretionary (-1.2%) sectors declined the most this week. Aside from the consumer discretionary sector, each of these sectors are up double-digit percentages this year.

Conversely, investors leaned defensively on the health care (+0.7%), real estate (+0.9%), utilities (+0.3%), consumer staples (+0.1%), and information technology (+0.1%) sectors. Granted, the outperformance of the tech sector was more likely a function of investors nibbling into beaten-down growth stocks.

The growth stocks helped the S&P 500 climb back above its 50-day moving average (4091) after it briefly dipped below the key technical level for the first time since March on Wednesday. 

Separately, the FOMC Minutes from the April meeting revealed that some participants thought it might be appropriate to start talking about tapering asset purchases in future meetings if the economy continues to make rapid progress towards the Fed's goals on employment and inflation.

The market didn't react too noticeably to this passage, arguably due to a view that it might have been more surprising to see no mention of the need to start talking about tapering asset purchases.

The 10-yr yield decreased one basis point to 1.63%, representing a view that the Treasury market isn't that concerned about inflation and is siding with the Fed's view that inflation will be transitory.

Inflation Jitters Send Market Lower, but Investors Buy the Dip at the End of the Week

The Stock Market Finished The Week In Negative Territory, But It Could Have Been A Lot Worse After Hot Inflation Data Upset The Market Mid-Week. The Nasdaq Composite (-2.3%) And Russell 2000 (-2.1%) Were This Week's Losers With Losses Over 2.0% While The S&P 500 (-1.4%) And Dow Jones Industrial Average (-1.1%) Declined Closer To 1%.

Through the first three sessions of the week, the Dow was down 3.4%, the S&P 500 was down 4.0%, the Nasdaq was down 5.2%, and the Russell 2000 was down 6.0%. Over the next two days, the Dow gained 2.4%, the Nasdaq gained 3.0%, the S&P 500 gained 2.7%, and the Russell 2000 gained 4.2%.

The horrible start was attributed to negative momentum in the growth stocks, rotational factors, and a noticeably hot Consumer Price Index (CPI) report on Wednesday. The m/m changes in consumer prices exceeded expectations, and when looking at the last six months to exclude easy base effect comparisons, total CPI was running at an annualized pace of 5.0%.

Investors used the weakness as an opportunity to buy the dip with a little help from several factors:

• A retracement in long-term interest rates, signaling that the Treasury market wasn't concerned about inflation even after receiving additional hot inflation data apart from the CPI report.

• Apple (AAPL) reclaiming its 200-day moving average (123.28) and the S&P 500 respecting its 50-day moving average (4064).

• The CDC saying fully vaccinated people can engage in most activities without masks.

• A view that the market was oversold on a short-term basis and was likely due for a bounce.

Eight of the 11 S&P 500 sectors still ended in negative territory, though, including the consumer discretionary (-3.7%), information technology (-2.2%), and communication services (-2.0%) sectors amid weakness in their mega-cap components. The consumer staples (+0.4%), financials (+0.3%), and materials (+0.1%) sectors closed higher.

It'll be interesting to see how the growth/technology stocks perform moving forward when money has been flowing into the cyclical/value stocks on reopening/inflation expectations and analysts have been calling for sustained underperformance. Many growth stocks are down substantially from their peaks in February.

The 10-yr yield increased six basis points to 1.64% from last Friday's settlement, but this was below the 1.70% settlement on Wednesday. Copper prices decreased 2% to $4.648/lb., representing many of the commodities that cooled off this week.

S&P 500 AND DOW RISE TO FRESH RECORD HIGHS ON CYCLICAL BIAS

Whatever it is, the way you tell your story online can make all the difference.

The S&P 500 Started The Week Extending Its Consolidation Pattern Amid A Rotation Into Cyclical Stocks, Then Ended The Week On A High Note As The Gains Broadened Out To The Battered Technology Stocks. The Benchmark Index Rose 1.2% To All-Time Highs, Putting It Behind Another Record-Setting Performance In The Dow Jones Industrial Average (+2.7%).

The Nasdaq Composite declined 1.5% after being down as much as 3.8% this week. The Russell 2000 increased just 0.2% to stay within its three-month consolidation trend. 

From a sector perspective, the cyclical energy (+8.9%), materials (+5.9%), financials (+4.2%), and industrials (+3.6%) sectors scored solid gains; conversely, the information technology (-0.5%) and consumer discretionary (-1.2%) sectors dragged on index performance amid relative weakness in their growth-stock components. 

This was one of the busiest weeks in earnings news, but like the weeks before, the results were not a catalyzing factor this week despite remaining on the side of better than expected. More interesting were the key economic reports that indicated a deceleration in the fast-paced economic recovery and perhaps explained the general lackluster response to earnings. 

Specifically, nonfarm payrolls increased by just 266,000 in April (Briefing.com consensus 1,000,000). The ISM Manufacturing Index for April decelerated to 60.7% (Briefing.com consensus 65.3%) from 64.7% in March. The ISM Non-Manufacturing Index for April decelerated to 62.7% (Briefing.com consensus 65.0%) from 63.7% in March.

The huge payrolls miss was the center of attention for market participants and lawmakers on Friday. The former suspected that the extended unemployment benefits provided a temporary disincentive for workers to seek employment, but this claim was refuted by the Biden administration. The Fed perhaps viewed the report as a justification to refrain from thinking about tapering asset purchases. 

On inflation, the Prices component within the ISM Manufacturing Index reached its highest level since 2008 at 89.6%, corroborating an observation from Warren Buffett that his businesses are seeing "substantial inflation" and that they're raising prices in response to the higher costs they are incurring.

Two things here: while the economic data missed elevated expectations, the ISM reports still indicated robust expansionary activity, and nonfarm payrolls growth was still positive. Interestingly, Treasury Secretary Yellen said interest rates may need to rise somewhat to prevent the economy from overheating, but later walked back her comments to say she wasn't predicting, nor recommending, the Fed to hike rates in response to government stimulus proposals.

Evidently, the peak growth narrative that slowed down the market last week was somewhat weakened this week based on the divide between the Dow (cyclically-oriented) and Nasdaq (growth-oriented). The latter would have outperformed if investors were concerned about economic growth rates. The ARK Innovation ETF (ARKK) -- a proxy for high-growth story stocks -- fell 9% this week. 

The Treasury market, however, remained a signpost for lingering peak growth concerns. The 10-yr yield decreased five basis points to 1.58% amid increased demand.

MARKET SWEATS OUT NEW HIGHS BUT ENDS WEEK MIXED AND LITTLE CHANGED

The Market Was Given A Lot Of Good News This Week, But It Had To Work Especially Hard For Incremental New Highs In The S&P 500 (Unch) And Nasdaq Composite (-0.4%), Which Was A Bit Frustrating For Bullish Investors. The S&P 500 Finished Flat, While The Nasdaq (-0.4%), Dow Jones Industrial Average (-0.5%) And Russell 2000 (-0.2%) Closed Slightly Lower.

Briefly highlighting the heavy slate of positive-sounding developments:

• Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Facebook (FB), and Tesla (TSLA) exceeded expectations on strong revenue growth.

• Fed Chair Powell said it wasn't time to start talking about tapering asset purchases, reiterating it'll take substantial further progress until the Fed's employment and inflation goals are reached. The FOMC left the fed funds rate and pace of asset purchases unchanged, as expected.

• Advance Q1 GDP increased at a 6.4% annualized rate (Briefing.com consensus 6.5%), personal income surged 21.1% m/m in March (Briefing.com consensus 20.5%) on the back of the stimulus checks, and PCE Prices were relatively tame on a year-over-year basis.

• President Biden outlined his $1.8 trillion American Families Plan to Congress. Some Senate Democrats were reportedly against the idea of significantly raising capital gains taxes to help fund the plan, but there was a view that some sort of additional infrastructure spending (traditional/social) will still get done.

And the reaction: three days of sideways activity, followed by one decent up day and then a disappointing finish to the week. The energy (+3.6%), financials (+2.4%), and communication services (+2.9%) sectors did end the week solidly higher, while the information technology (-2.1%) and health care (-1.9%) sectors fell 2%.

So, what happened? Well, in the five weeks leading into JPMorgan Chase's (JPM) earnings report before the open on April 14, the S&P 500 rallied around 8%. In the two weeks since, the S&P 500 gained 1.4%, which suggested that a lot of the earnings news was priced in during the pre-earnings run.

More nettlesome, though, was that the market's behavior to good news this week fed into the "peak growth" narrative, which says that the stock market will find it harder to keep rallying when economic/earnings growth rates moderate. In the meantime, the market just consolidated for the second straight week.

The 10-yr yield increased six basis points to 1.63%.

MARKET SNAPS HOT STREAK AMID CONSOLIDATION ACTIVITY AND TAX NEWS

The Stock Market Finished Mixed And Little Changed In A Week Marked By Consolidation Activity And Heated Tax Discussions. The S&P 500 (-0.1%), Dow Jones Industrial Average (-0.5%), And Nasdaq Composite (-0.3%) Finished Slightly Lower, While The Russell 2000 (+0.4%) Closed Slightly Higher.

Starting with some perspective, the S&P 500 was up 7.0% over the prior four weeks with roughly 95% of its components trading above their 200-day moving averages. Sentiment had gotten really bullish, too, giving credence to the view that the market was due for normal sideways action or a pullback.

The market took the former route, seemingly allergic to selling interest. There was one day of noticeable selling, though, and that was on Thursday after Bloomberg reported that President Biden was planning on proposing increasing the capital gains tax rate to 39.6% from 20.0% for those earning $1 million or more.

This rate would be bumped to 43.4% when including the 3.8% tax on investment income that funds the Affordable Care Act -- and that's before state taxes are applied. Based on the facts that The New York Times published a similar report earlier in the day and that this was a part of the president's campaign, the news was viewed a convenient excuse to take profits.

True to recent usual form, though, investors bought the dip on Friday amid optimistic undertones that comprised of speculation that negotiations could reduce the rate, strategies to work around the taxes, and observations about the market's historical ability to weather tax increases.

Despite the comeback effort, the S&P 500 energy (-1.8%), consumer discretionary (-1.2%), and utilities (-1.0%) sectors still closed lower by at least 1.0%. The health care (+1.8%) and real estate (+2.0%) sectors were the clear winners.

In other key developments, earnings reports continued to beat expectations for the most part, weekly initial claims fell to a new post-pandemic low at 547,000 (Briefing.com consensus 600,000), and new home sales surged to its highest annual rate (1.021 million) since August 2006.

The 10-yr yield was unchanged at 1.57% in a tight-ranged trading week.

GROWS LEGS AS PARTICIPATION WIDENS

Each Of The Large-Cap Indices Rose More Than 1.0% In This News-Heavy Week, With The S&P 500 (+1.4%), Dow Jones Industrial Average (+1.2%), And Nasdaq 100 (+1.4%) Hitting New All-Time Highs. The Nasdaq Composite Increased 1.1%, And The Small-Cap Russell 2000 Increased 0.9%.

Gains were logged across ten of the 11 S&P 500 sectors, including the utilities (+3.7%), materials (+3.2%), and health care (+2.9%) sectors with the biggest gains. The communication services sector (-0.01%) was the lone holdout amid softness in its top-weighted components.

Briefly highlighting the key events, the big banks reported better-than-expected Q1 earnings reports and issued upbeat commentary, core CPI for March was muted on a year-over-year basis at 1.6%, retail sales surged 9.8% m/m in March (Briefing.com consensus +5.3%), Coinbase (COIN) became a public company, and federal agencies recommended a pause in Johnson & Johnson's (JNJ) vaccine.

There were a lot of narratives surrounding these events, but the takeaway for the market was that the good news was good, and the bad news wasn't bad enough to detract from the good news. To illustrate, the JNJ vaccine news was disappointing, but the alternatives are plentiful. Coinbase struggled after its open, signaling buyer exhaustion, but ARK Invest's Cathie Woods scooped up shares.

The market simply showed no quit and respected the bullish trend (particularly in the S&P 500) despite calls for a pullback/consolidation.

In the background, the Fed did what the Fed has done: make sure markets know that it will keep monetary policy accommodative, even as the economy and labor market continue to rebound. Fed Chair Powell added that once substantial progress on its employment and inflation goals has been reached, it will start to taper asset purchases well before it raises interest rates.

The one surprising thing from this week was that long-term interest rates accelerated their monthly downtrend despite strong economic data. The 10-yr yield declined ten basis points to 1.57%, including an 11-bps drop in one day, in a move fueled by short-covering activity.