Inflation looms over big tech and growth stocks like an approaching hurricane, keeping investors wondering when and how big it will hit. Last week’s jobs data supported the government’s case that there is still support needed for economic recovery and that inflation is transitionary. But a shutdown oil pipeline over the weekend has investors worried. And the coming updates on consumer and producer price index data are causing them to take a cautious stance.
The market is the great fortune teller, always trying to price in the future, not the present. We saw that in action this week in several ways. The first was with Janet Yellen’s comments on Tuesday that interest rate hikes might be needed in the future. That sent investors into a frenzy sell-off before she walked back the comments.
It was the cyclical sectors that ruled the week. Energy ( XLE ), Materials ( XLB ), Financials ( XLF ) and Industrials ( XLI ) were the top four sectors of the week.
More records were set as the S&P 500 and Dow Jones Industrial average both had record closes while the Nasdaq and Russell 2000 joined the rally, also making gains. Employment data in the morning caused the dollar to fall which can give a boost to mega-caps and growth stocks.
Another record was set for the Dow Jones Industrial average while value stocks continue to outpace growth stocks. Two intraday rallies might just be the action the Nasdaq needed to join the rally, but the gains were mostly isolated to the mega-caps.
This is not the rally we are looking for. The Dow Jones Industrial average closed at a record high today while the rest of the market struggled to hold any gains, with the Nasdaq and Russell 2000 falling further behind the other major indexes.
The market sold off sharply at open after comments from Janet Yellen suggested that interest rates might need to increase to keep the economy from overheating. Investors fled sectors more sensitive to interest rate hikes and rotated into the cyclical sectors.
The cyclical sectors soared. The others did not. A rotation into reopening and cyclical stocks played well for all the major indexes except the Nasdaq which is heavy in big-tech and growth stocks.
The week began with continued momentum from the end of the previous week as investors speculated ahead of earnings reports from the biggest most influential companies in the market. Those companies gained on Monday as investors became more bullish , sending the put/call ratio to an overly bullish level. The result was that much of the positive earnings reports were already priced into the market, setting expectations even higher.
Energy ( XLE ) led the weekly sector list for the first time since the first week of March. The sector was helped by oil prices that rose on Tuesday and Wednesday, and positive earnings reports from Exxon Mobile and Chevron.