Friday's Market Minute: Markets Have Mixed Emotions

The day after the FOMC policy decision had fixed-income traders in agreement that the front end of the curve will be anchored, and the long end is relatively free to roam for now. The playbook on Wall Street over the next couple of months will be to ride the reopening of the economy and double down on the cyclical rotation trade, which ironically has also become the new momentum trade. Sectors that are benefitting now include autos, banks, energy, and materials. Add consumer discretionary to the mix and we have the five sectors with the largest increases in earnings estimates over the past few months.

The U.S. is still early in this economic expansion and with financial conditions still looking healthy, stocks should still broadly rally in the intermediate-term. In the short term, equities are pulling back some as markets reprice inflation risks, with the Nasdaq bearing the brunt of the losses. One should expect volatility will remain high over the next few months, especially as technology stocks work through their valuation correction.

Yesterday’s equity market pullback had an interesting twist added to it with oil down over 7% for the day. There was a modest rise in U.S. crude inventories relative to the previous week, but the price action was rather large considering the cyclical nature of commodities and overblown fears of rampant inflation. The demand picture for oil remains cloudy, particularly with the deceleration in vaccine rollouts across Europe. The prospect of tougher lockdown restrictions in France and Italy highlights the challenges countries are still facing in controlling the virus. Economically, the picture is much brighter across the globe. However, difficult economic conditions in Europe continue to weigh on the global demand for crude, and persistent concerns over Covid-19 still exist.

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