Yahoo Finance Strong Job Growth Sends Wall Street to New Highs, but What's Next?
- By Panos Mourdoukoutas
News of an improving labor market sent major U.S. equity indexes to new highs last week. The S&P 500 closed at 4,128.80 on Friday, up 2.7% for the week, while the Dow Jones closed at 33,800.60, up 2%. The Nasdaq composite closed at 13,900.60, up 3.1% for the week as tech shares regained their momentum.
Total non-farm payroll employment rose by 916,000 in March, twice the gains seen in February, while the unemployment rate dropped below 6%, according to a report published by the Bureau of Labor Statistics. That was the day U.S. equity markets were closed for Good Friday, so traders and investors had to wait for the new week to place their bullish bets on equities.
Strong job growth is a tailwind for equities, as it boosts household income and spending, which eventually translates to higher earnings and equity prices.
Equity gains would likely have been even better if it wasn't for a report at the end of the week that showed that U.S. inflation at the wholesale level is picking up even ahead of Wall Street's heightened expectations. Higher inflation pushes long-term debt yields higher, making equities worth less over time and thus making them less appealing to conservative investors.
What's next for equity prices in this case? Will Wall Street continue to reach new highs, or is it prime for a correction? It depends largely on new inflation statistics as the economy recovers. The next inflation numbers will be published on Monday, which can either ease or add to Wall Street's anxiety.
Then there's the earnings season which is about to get underway, with banks and financial companies taking the lead. JPMorgan Chase (JPM), Wells Fargo (WFC) and Goldman Sachs (GS) report on Wednesday, while Bank of America (BAC), Citigroup (C) and several regional banks report on Thursday.
Banks and financial company shares have been rallying on Wall Street thanks to several tailwinds that have created a favorable environment for boosting their top and bottom line. The interest rate spread, a measure of bank core business profitability, has been widening. Home sales have also been strong throughout the pandemic, fueling a healthy demand for mortgages.
Meanwhile, big banks have benefited from soaring SPAC deals and a healthy trading volume, especially when compared to a year ago. Banks may surprise on the upside, which I believe would send major equity averages to new highs, provided that new inflation numbers do not spoil the party.
Disclosure: No positions
Read more here:
Inflation Is Back on Wall Street's Radar
The Fed Reassures Markets About Easy Monetary Policy as Jobless Claims Rise
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This article first appeared on GuruFocus.
