Market Insights

Stocks pulled back last week, but there are signs that the bulls remain in control.

The S&P 500 fell 0.8 percent, while the Nasdaq-100 slid just 0.5 percent. It was the first time in five weeks that the technology-heavy Nasdaq outperformed the S&P 500. It could be important because major Nasdaq companies like Apple (AAPL) and Tesla (TSLA) have struggled lately as investors pivot to “value stocks” that benefit from the economy reopening.

Several other notable things happened last week. Most suggested positive trends continued or accelerated:

• Fed Keeps Rates Low But Upgrades GDP
• The VIX Breaks 20
• Communications Stocks Lead
• Air Travel Rebounds
• Is M&A Coming Back?

Fed Keeps Rates Low But Upgrades GDP

Interest rates have been a major concern in the last month because a rebound in the economy has pushed Treasury yields back to their highest levels since the start of the coronavirus pandemic. The Federal Reserve acknowledged the recovery by raising its yearly growth forecast from 4.2 percent to 6.5 percent. But it also kept a pledge to keep short-term interest rates low through 2023.

It’s perhaps the most bullish policy in the central bank’s history. Jerome Powell will let inflation inch higher without slamming on the brakes as ex-chairman Paul Volker famously did in 1981. That creates the potential for companies like financials, retailers and industrials to profit from an accelerating economy. It can additionally support high-multiple technology stocks that often struggle when rates increase.

Powell will remain in the news this week because he’ll testify before Congress tomorrow and Wednesday. Other Fed officials including Lael Brainard, Raphael Bostic, Thomas Barkin, Randall Quarles, Mary Daly and John Williams also have speeches scheduled.

The VIX Breaks 20

Cboe’s volatility, the “VIX,” ended Wednesday at 19.2 after the Fed meeting. While it subsequently rebounded, it was the first close below 20 since February 21, 2020. Lower VIX readings can suggest investors are less worried about stocks declining. It can also let portfolio managers take larger positions in the market.

Other milestones last week were new record highs for the Dow Jones Industrial Average and S&P 500. The Dow made its initial foray above 33,000, while the S&P 500 neared 3984 for the first time.

The S&P 500 held some potentially important levels when it pulled back. Friday’s 3887 low was less than 2 points from support levels on February 10 and 18. It also managed to close above the 21-day exponential moving average (EMA) after testing below it.

Communication Leads as Facebook Surges

Communications were the top-performing sector last week. This bucket of stocks, established 2-1/2 years ago, includes major Nasdaq companies like Alphabet (GOOGL), Facebook (FB) and Netflix (NFLX).

FB was one of the top performers last week, rallying 8.1 percent after CEO Mark Zuckerberg said his social-media platform could emerge stronger after Apple (AAPL) changed privacy rules. That’s the opposite of his grim predictions last year.

Discover (DISCK), another communications stock, was the S&P 500’s second-best gainer last week.

Homebuilders, gold miners and semiconductors also climbed last week. Energy, metals, financials and small-caps lagged.

Air Travel Rebounds

Another big story came from the Transportation Security Administration: Airport screenings are now firmly back above 1 million per day. That’s a huge improvement from the second half of 2020, when when they were routinely below 800,000.

Other headlines confirmed the trend. JetBlue (JBLU) called flight attendants back to work and raised guidance. American Airlines (AAL) CEO Doug Parker said bookings are the strongest since the crisis began.

Meanwhile, government data shows the Covid death rate is down to its lowest levels since early November.

Is M&A Coming Back?

Merger activity fell the last three years and slowed even further in early 2021. But recent weeks have brought signs of a rebound. Last week saw insurance company Chubb (CB) bid $23 billion for smaller rival Hartford (HIG). It followed M&T Bank’s (MTB) $7.6 billion purchase of People’s United Financial (PBCT) and Goodyear Tire’s (GT) $2.8 billion grab of Cooper Tire (CTB).

The trend continued over the weekend when Canadian Pacific (CP) dropped $25 billion for Kansas City Southern (KSU). It would create a railroad network spanning 5,000 miles from Alberta Province to the Pacific Coast of Mexico.

Mergers could be interesting to watch as confidence recovers from last year’s crisis. That’s especially true because of the strength in value stocks and small caps — the type of companies that could be targeted by buyers.