The major indices all hit record highs – even small-caps which have been lagging since March. The broad-based rally was fueled by strong earnings, solid economic numbers, and seasonality, even in light of overbought momentum readings. The Fed’s well-communicated plan to start dialing back its stimulus measures did not shake the confidence of the market as even Treasuries remained stable in wake of the taper announcement.
The week’s economic releases were bullish for the second straight week as well. The ISM services PMI beat expectations with a 17-year high reading of 66.7, the weekly number of new jobless claims hit another pandemic-era low, and factory orders also surprised to the upside. The ISM manufacturing PMI beat the consensus estimate as well, but construction spending and the IBD/TIPP economic sentiment numbers were hurt by both continued supply chain issues and price pressures. The ADP payrolls number smashed expectations, and the government jobs report confirmed the improving labor market.
The short-term technical picture remains bullish, and while the major indices are now overbought, the advancing trends are clearly intact in all time-frames. The S&P 500, the Dow, and the Nasdaq are well above their rising 50-day and 200-day moving averages. Small-caps experienced an explosive rally, with the Russell 2000 breaking out to a new all-time highs for the first time since March, finishing the week well above both its moving averages as well. The Volatility Index (VIX) hit its lowest level since early-July following the Fed meeting, getting very close to its pandemic-era low, but the sentiment measure still finished the week virtually unchanged near the 14.5 level.
Inflation will be in focus next week, but thanks to the Fed’s stance regarding price pressures being transitory, investors might continue to look past the worrisome short-term trends. The Producer Price Index (PPI) and the Consumer Price Index (CPI) will be out on Tuesday and Wednesday, respectively, while the JOLTS job openings estimate and the Michigan consumer sentiment number will highlight Friday’s session. The leaders of the Fed, the European Central Bank, and the Bank of England (BOE) will also give speeches at a high-level conference on Tuesday, so stocks, Treasuries, and currencies might be in for another volatile week.