Market Insights

What if inflation isn’t defeated as hoped? That was the big fear on Wall Street last week.

The S&P 500 fell 2.7 percent in the holiday-shortened period between Friday, March 17, and Friday, March 24. It was the biggest weekly drop since early December, returning the index below 4,000. Just 12 percent of its members managed to advance, while the number of new 52-week lows shot to its highest level this year.

No single headline clearly triggered the decline. It seemed to result from a simple continuation of bearish momentum the previous week. Still, the news bolstered fears that lingering inflation will force the Federal Reserve to keep interest rates higher for longer. Revised numbers for gross domestic product (GDP) included a sharp upward revision in prices. The Personal Consumptions Expenditures (PCE) inflation reading for January zoomed past forecasts, as well.

Initial jobless claims also fell by 2,000 instead of rising by 6,000 as expected. That mix of high inflation and a strong job market potentially increases the odds of interest rates staying higher.

For example, CME’s FedWatch tool showed a 28 percent chance of central bankers raising rates by 50 basis points on March 22. A month ago, it was near 0 percent. The market now sees rates peaking at 5.5 percent in June, up the 5 percent level anticipated in late January.

Nvidia Rose, Most Others Fell

Of the 11 major sectors, energy was the only to climb last week. And it rose just 0.2 percent, while eight other sectors fell at least 2 percent.

Consumer discretionaries led the selling as investors shed retailers, automakers and restaurant stocks. Biotechnology, solar-energy stocks, Chinese tech firms and gold miners also tumbled.

Semiconductor stock Nvidia (NVDA) jumped almost 9 percent after earnings and revenue beat estimates. CEO Jensen Huang boosted optimism by saying that artificial intelligence (AI) is at “an inflection point” and poised for lasting growth.

Domino’s Pizza (DPZ) and Moderna (MRNA) had the biggest drops in the S&P 500 because of weak quarterly results. DPZ reported “significant pressure on our U.S. delivery business.” MRNA’s earnings missed estimates by a wide margin as demand collapses for coronavirus vaccines.

Charting the Market

The S&P 500 ended last week under its 50-day moving average for the first time since January 19. That’s a potential sign of its intermediate-term uptrend fading.

TradeStation data showed another potentially bearish condition: Just six members of the S&P 500 hit new 52-week highs last week, while 11 made new 52-week lows. That could represent a shift from November, when highs mostly outnumbered lows.

Two other important charts that often move in the opposite direction as the S&P 500 rose. The 10-year Treasury yield pushed above its December high around 3.9 percent. It remained there all week, a potential sign its longer-term uptrend is continuing.

Next, Cboe’s Volatility Index (VIX) spent the entire week above 20. It last did that in early January. Further upside could weigh on stocks.

The Week Ahead

This week is relatively quiet, with a handful of economic events and earnings reports.

Pending home sales are due this morning.

Tomorrow morning focuses on the the consumer. Target (TGT) and Norwegian Cruise Lines (NCLH) report in the premarket, followed by consumer confidence shortly after the opening bell.

The Institute for Supply Management’s manufacturing report is on Wednesday morning, along with crude-oil inventories. Lowe’s (LOW) and Dollar Tree (DLTR) report in the morning. Salesforce.com (CRM) is in the afternoon.

Thursday features initial jobless claims and results from Best Buy (BBY) and Costco (COST).

The week concludes with ISM’s service-sector index on Friday morning.