Markets Advance on Strong Economic Data; Bonds Slip

The Dow (+0.0%), NASDAQ (+2.3%) and S&P 500 (+1.4%) each advanced for the week, and with the S&P 500 breaking through the all-time high milestone of 5,000.  Meanwhile, taxable bonds were down about 0.8% and tax-free municipal bonds were down about 0.5%.  The 10-year Treasury yield climbed 0.14% to finish the week at 4.17%.

Last week was marked by strong economic news and corporate earnings reports from the large tech companies.   It was mostly the tech earnings reports that propelled the markets, as evidenced by the sharp rise in the NASDAQ and little change to the Dow.  Additionally, the Institute of Supply Management (ISM) report showed that the services sector, the largest part of the US economy, reported very strong data.  This was also met with the jobless claims report dropping, implying that the labor market remains robust.  However, this strong economic data along with the prices paid index of the ISM data could cause inflationary pressure.  This further supports the Fed to not cut interest rates in March, as many investors had hoped.  As a result, bonds lost value, causing the 10-year Treasury yield to rise. 

While the inflation rate has been dropping over the past year, goods and services are still far more expensive than they were a few years ago and wage growth hasn’t kept up.  This has led to credit card default rates to rise sharply, approaching an 11-year high as shown by the chart below.  This has led many investors to remain concerned that consumer spending could slow down, ultimately causing the US economy to slow.  This isn’t fun for those impacted, but that is essentially the purpose of the Fed to raise interest rates, because that ultimately causes economic activity to slow down.  The extent of the potential slow down remains to be seen.

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^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}