Can Stocks Move Even Higher?

Week from 28 June to 4 July 2021

U.S. broad market indices head into the second half of the year at record highs. Equities keep rallying in the wake of a positive jobs report in June, shrugging off inflation fears as the average hourly pay for private sector employees rose 3.6% from a year earlier. Despite labour shortages, the U.S. economy added 850,000 jobs in June, especially in sectors hit hard by the pandemic. This is the strongest one-month employment gain since last summer, well ahead of Dow Jones estimates of 706,000. This improvement reflects the momentum and strength of the U.S. economy as well as a slight easing of the labour supply constraints. Yet the U.S. labour market is still far from being back to normal, down 6.8 million jobs compared with February 2020. Despite the recent job additions, the unemployment rate increased to 5.9% in June, highlighting an unprecedented mismatch between worker supply and demand.

Against this backdrop, the key question for investors is whether stock markets can continue to push higher in the near future. With equity prices at peak levels, it will mostly depend on what firms will say about the 2nd quarter and the rest of the year as the earnings season is about to begin. Positive earnings revisions are clearly required to go up again.

Fear Of Missing Out? 

The S&P 500 rose to an all-time closing high (4,352.34, +1.67% week-over-week). The NASDAQ did even better (14,639.33, +1.94%) helped by a rally in big tech. Apple and Microsoft were up 5.15% and 4.77% respectively. Facebook gained 3.90% (the company is worth more than $1 trillion today) after a federal court dismissed antitrust suits against the social media giant by the Federal Trade Commission. Amazon jumped 3.22%. By contrast with their large-cap counterparts, small cap stocks lost ground (Russell 2000 down 1.23%).

Among the S&P sectors, information technology led the pack (+3.24%), followed by consumer discretionary (+2.07), health care (+1.99%) and communication services (+1.89%). On the flip side, energy slipped more than 1% even though oil prices rose for the sixth straight week (WTI crude up 1.5% at $75.16 a barrel). OPEC+ producers could increase their output less quickly than expected in the coming months. Financials hovered around the flat line (-0.11%) as falling bond yields soured investor sentiment on banks. Once again, defensive sectors such as real estate and utilities performed poorly (flat over the week).

European and Asian markets struggled on fears that the highly contagious Delta coronavirus variant leads to new lockdown measures such as those imposed in Australia, where nearly half of the population is now under stay-at-home orders in the country’s largest cities. The MSCI EMU was down 0.67%, the Nikkei fell 0.97% while the Shanghai Composite nose dived by 2.46%.

Yields head back down

Treasury yields dipped again after the U.S. jobs report. The yield on the benchmark 10-year T-note fell 10 basis points over the week, touching its lowest level since early March (just below +1.44%). Same trend in Europe where the 10-year German bond yield slipped 8bps to -0.24%. The French OAT yield also moved lower from +0.20% to +0.10%.

In this context, investment grade corporate bond prices rebounded (+0.30% in Europe, +0.31% in the U.S.). High-yield bonds were mixed (flat in Europe, +0.45% in the U.S.). Emerging debt was weaker (-0.68% in local currencies) as the greenback traded higher against the major currencies (dollar index up 0.47% week-over-week at 92.24). In commodities, gold continued to rise slowly (spot price up 0.33%).

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