This market reminds us of the old adage: How do you climb Mount Everest? One step at a time.
That’s how this rally has been during the pandemic. Meandering a path that seems at times insurmountable, other times flat—and sure; at times the oxygen level has felt a bit thin—but over time scaling to heights not seen before.
Futures activity this morning suggests the S&P 500 Index (SPX) may take another page out of this week’s playbook by rising a little bit yet still closing at a record. After all, anything higher than yesterday, even a 1 point gain, would be new territory.
The wider story though appears to be that investors may be treading softly ahead of the earnings season that gets into high gear next week. Analysts expect profits from SPX companies to come in a good bit higher than in the first quarter last year. But that’s probably not that high a peak to scale given the impact of the coronavirus on businesses in the first three months of 2020.
Still, if recent patterns hold up, a sizable chunk of SPX companies may end up beating consensus expectations, perhaps providing the market with a few more footholds in its climb higher. Of course, if expectations aren’t met, the market could find itself on a slippery slope.
There doesn’t seem to be much reason to think that the Friday of a slow week will see much more volume than in trading sessions earlier in the week unless there’s something in the news flow that surprises investors. After all, there can be unexpected gales when you’re high on a mountain.
Inching Higher
It’s been interesting to watch the SPX hit record highs this week on lighter-than-average volume.
While it’s always encouraging to see new records, there hasn’t been tons of excitement around the freshly gained territory for the broad index as the gains themselves haven’t been huge.
It looks like the market has support from the continued vaccine rollout, Congressional stimulus, and the Fed’s apparent willingness to keep monetary policy loose for some time. But those are factors that the market has known about and mostly priced in.
So it appears that the default sentiment is bullish, but there hasn’t been a whole lot of newness to propel the market meaningfully higher—aside from the incremental record highs.
Uncertainty Helps Tech Trade
Investors also seem to be at a place where they’re not too sure whether to keep plowing money into the reopening trade or whether to keep their guard up a little by holding onto stay-at-home stocks in case the U.S. vaccination effort runs into major unforeseen hurdles.
That indecision has left an opening for what were once Wall Street’s go-to stocks—the megacap tech players.
But then they and other growth stocks fell out of favor as inflation expectations boosted longer term treasuries. Now that the 10-year yield is back below 1.7% and investors are unsure of where else to put their money, it seems that the FAANG names are once again resuming a mantle of leadership and the tech-heavy Nasdaq Composite (COMP) has been playing catch up.
Banks To Report Earnings Next Week
It seems that one other reason trading volumes have been lackluster this week is that investors may be holding off until they see what bank earnings hold.
Banks are in an interesting position at the moment as the yield curve has been steepening and the economy has been getting better. An economic rebound could mean greater loan volume for financial institutions even as rising long-term interest rates mean the banks can earn more money on interest from those loans relative to what they have to pay on interest for short-term deposits.
Along with smaller and regional banks, there are some other names investors might want to pay attention to as they also report earnings next week.
There are also some economic reports out next week that could move the market. The March consumer price index is scheduled for release Tuesday morning, and the March retail sales report is on the calendar for Thursday morning. Data on March housing starts and building permits, along with the preliminary April University of Michigan Consumer Sentiment Index round out the week on Friday.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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