Busy Week On Tap As Yellen Testifies To Congress, Key Economic Data Due

The main bulk of earnings are in the rear view mirror, but there’s plenty of excitement this week, including key data and a visit to Capitol Hill by Fed Chair Janet Yellen.

Stocks appear headed for a higher start Monday, lifted in part by solid gains overseas. All three U.S. indices scored record highs last week, and more records may be on the way.

The new administration last week promised some sort of tax policy announcement in the next “two to three” weeks, and that seemed to help fuel the rally. If the forecast for two to three weeks proves accurate, this wouldn’t appear to be the week the market learns more about President Trump’s promised “phenomenal” tax policy.

The highlight this week is arguably Yellen’s “Humphrey-Hawkins” monetary policy testimony to Congress. She’ll testify to the Senate Banking Committee on Tuesday and to the House Financial Services Committee on Wednesday.

When Yellen talks, rates are seldom far from investors’ minds, especially after the Fed raised rates in December and forecast three additional hikes this year. At this point, the market is actually pricing in just two hikes. Fed funds futures indicate about a 17% chance of a rate rise in March, but Yellen’s testimony this week could cast more light. If she sounds hawkish, chances for a March hike might start to climb, and already are up significantly from the lows of last week.

Recall that after the Fed’s meeting earlier this month, its statement said, in part, “Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remain low.”

So one question is whether Yellen stays with that assessment or diverts in any meaningful ways. She may also get asked about President Trump’s proposed policies—including stimulus proposals and possible tax reform—and the potential impact of such policy on economic growth, inflation, and jobs. Doubtless, Yellen could keep investors on their toes if she receives and addresses such inquiries.

Tuesday brings producer price index (PPI) data, followed on Wednesday by the consumer price index (CPI) (see below). Also due Wednesday: Retail sales for January.

That’s not all. The housing market steps back onto stage Thursday with housing starts and building permits data for January. Housing has been mostly a bright spot in the economy recently, so we’ll see if that continues.

Investors may also watch overseas markets this week after Japan’s Nikkei rose sharply Friday and added to those gains Monday. In addition, gold has stepped back from recent highs, and 10-year Treasury yields rose back above 2.43%. The U.S. Dollar Index continues to pivot around the 100 level, historically high but off slightly from the peaks of earlier this year. The dollar was up early Monday.

In the meantime, plenty of earnings remain part of the mix, even though a large majority of big firms have already reported (see below).

With the markets forging new highs late last week for all the major indices, it gets a little more difficult to forecast the next resistance levels. But for the S&P 500 Index (SPX), the round number of 2320 might prove a resistance point if the market continues to rally.

Inflation Gets the Spotlight

Even as Yellen testifies on Capitol Hill Tuesday and Wednesday, Congress and the rest of us will be getting a look at the latest inflation data, something the Fed watches carefully. Tuesday morning brings the producer price index (PPI) for January, followed up Wednesday morning by consumer price index (CPI) data. Back in December, PPI rose 0.3% and CPI rose the same amount, both in line with Wall Street analysts’ expectations. On a year-over-year basis, CPI is up 2.1%, the largest increase since mid-2014. The Fed has said its inflation target is 2%, but the Fed also looks closely at the PCE price index, which was up just 1.6% year-over-year in December. So judging from PCE, inflation still has some catching up to do to reach the Fed’s goal. 

Not Done With Earnings Yet

Just because the bulk of earnings are in the rear view mirror doesn’t mean there aren’t any left. Some of the higher-profile companies reporting this week include PepsiCo, Inc. PEP, Kraft Heinz Co KHC, Cisco Systems, Inc. CSCO, MGM Resorts International MGM, and Deere & Company DE. That looks like a nice mix of different sectors, and the following week offers another pretty bountiful load of earnings, despite being one day short due to the Feb. 20 President’s Day holiday. Earnings results have generally come in above expectations.

Valuation Vectors

Entering February, the S&P 500 Index (SPX) carried a price-to-earnings (P/E) ratio of 25.6. And that was before last week’s surge to new record highs for all three major indices. Historically speaking, valuations are rich, said research firm CFRA, and this bull market is now nearly eight years old, making it the second longest since World War II. That doesn’t mean, however, that there’s no room for further stock market gains. Assuming earnings per share continue to recover from their recent recession and inflation remains subdued, stocks can still climb this year, CFRA said. Keeping all that in mind, investors should consider approaching the market carefully, and think twice about an “all in” approach. Diversification and portfolio balance are always important, but at times like these they arguably make more sense than ever.