In a mixed and extraordinarily choppy week of trading, the Dow (+1.8%), and S&P 500 (+0.8%) advanced, while the NASDAQ (-2.0%) declined. Meanwhile, taxable bonds continued their descent by falling nearly 1% last week, and tax-free muni bonds were mixed to slightly lower. In the past month, we are experiencing a reversal from 2020, as technology companies approached correction territory, dipping nearly 10% from their recent highs. On the flip side, high quality dividend-paying “value” stocks (often represented by the Dow) have advanced. Last year, we observed a giant disparity, as the NASDAQ gained 43%, while the Dow gained “only” 7%.
Despite excellent economic news, the markets and headlines have been dominated and impacted by the sudden and swift rise in interest rates over the past month. The headlines have also demonstrated that Congress is close to passing the $1.9 trillion stimulus package, but that seems to be “old news”, as they have been negotiating this package since prior to the election five months ago. As noted in several previous recaps, lower interest rates support higher PE ratios that are typical of high-risk assets, such as growth and technology stocks represented by the NASDAQ. Thus, the rise in interest rates has been impacting those stocks more than the rest.
As far as economic news, the February jobs report was stellar. The February US manufacturing data was the best in three years, and also exhibited the 2nd greatest amount (trailing only January) of growth in 11 years. Corporate earnings reports are also showing that the S&P 500 companies have exceeded their earnings from prior to the pandemic. Of course, that earnings data is rather segmented in our economy, as restaurant owners and airlines certainly can’t paint that same picture. So, while the economic fundamentals remain very strong, the markets are currently being driven by the volatility of the interest rate environment, and that volatility may last a little while longer. So, strap on your boots, because the wild ride isn’t over yet!