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February Economic Update

Market Summary

Stocks were mixed in January due to a pull back at the very end the month which has since been recovered by the first week of February. For the past month and a half, major stock market indices have been oscillating in expanding ranges characterized by multi-day pullbacks undercutting the prior short-term lows, then followed by multi-day rallies to new highs. These gyrations have largely been attributed to mixed economic recovery data, vaccine optimism and skepticism, the discovery of new COVID-19 strains, mostly positive corporate earnings, and stock market headlines such as the recent GameStop phenomenon.

Economic Developments

With the stock market at record highs, there are concerns regarding rising interest rates in the bond market which have been raising questions regarding stock valuations. In essence, higher interest rates from holdings bonds, which generally carry less risk than owing stocks, may become increasingly attractive to investors leading to decreased demand for stocks.

Interest rate jitters may have contributed to some unusual reactions to strong fourth-quarter earnings reports. By the end of January, 37% of S&P 500 companies had released their earnings. Of those companies, a staggering 82% reported larger than expected earnings. However, stock prices of those companies with positive earnings results fell in the two days preceding and following their earnings releases; on average retreating by 1.2%. While some of these stocks have since rebounded by the first week of February, pressures from rising interest rates may continue to apply downward pressure for stocks moving forward. (1,2,3)

Recently, the Federal Reserve has drawn criticism its ongoing $40 billion monthly purchases of mortgage-backed securities to meet its inflation objectives. Given the considerable rise in housing prices over this past year, critics are questioning why the Fed would continue to inflate the real estate market, especially when the Federal Reserve's own measure of inflation (CPI) does not factor housing prices into its equation. (4)

To further obscure the issue, Fed Chair Jerome Powell stated, "The housing sector has more than fully recovered from the downturn, supported in part by low mortgage interest rates." Notably, housing prices relative to employment wages are now approaching levels not seen since just prior to the 2008 housing crisis. (5)

Looking Forward...