This week the U.S. financial markets proved to be remarkably resilient. Positive new jobless claims and unexpected strength in factory output numbers added to the confidence despite the contradictory economic indicators. Our analyst team found that these events provided the biggest jolt to headline stock indices. This was the case despite homebuilder confidence dropping and mixed inflationary signals.
The Labor Department released very solid jobless claims numbers, the sign of a strong labor market. This data coincided with unexpected improvements in factory output, which surprised many economists who had anticipated stagnant growth. Retail sales pulled off a decent beat, indicating that consumers are continuing to spend in the face of prevailing economic fears.
The Philadelphia Federal Reserve’s index in manufacturing just experienced its largest-ever monthly increase. Such a wave would certainly contribute to the growing narrative that the sector has turned the corner and is on its way back. These hopeful signs came together to put everyone in a good mood on Wall Street, as investors seemed ready to cheer all the news in these positive times.
Yet, surprisingly, not all economic indicators were so sanguine. Homebuilder confidence suffered a sharp decline, indicating the impact of increasing costs and supply chain issues on the housing market. This dramatic decline created uncertainty not only for the future of home construction and real estate, but in the economy at large.
Inflation metrics were a critical part of the story in reconfiguring market sentiment. The Producer Price Index (PPI) for the month of April printed recently at -0.5%, about as far beneath expectations of a +0.3% rise as it’s possible to get. This jarring juxtaposition served to underscore the deflationary pressures that were building in the economy. Earlier this week, the Consumer Price Index (CPI) came in with pretty tame readings, adding more fuel to the CPI’s discussions about inflection points and trends.
The yield on the benchmark 10-year Treasury note fell by nine basis points to 4.44%. Still, it’s a 7 to 8 bps higher for the week. This drop in yields is usually interpreted as an indication of investor nervousness in uncertain economic times.
Equity markets cheered the signs of economic strength in the data. With the fourth gain in a row, the S&P 500 ended the day at 5,916.93. This positive trend carried across to the other large indices. The Dow Jones Industrial Average re surged 272 points, closing above 42,300, a highlight of extensive investor confidence.
On the other hand, the Nasdaq composite index called it a day on a week of strong upswings. Specifically, the so-called new economy stocks, including tech behemoths Nvidia and Tesla, extended their liquidity driven advance with each up more than 15% wtd. Together these stocks represent by far the most important drivers of market performance. They underscore the continued potency of tech in today’s economy.