After a brief pause on Friday, the S&P 500 and Dow Jones Industrial Average are set to resume their rally today with futures of both benchmarks indicating a higher open.
Some investors remain concerned about the surge in Covid-19 mutations, but it’s fiscal and monetary policies along with earnings that will determine the next move in equities.
Expectations of substantial fiscal aid are keeping the bulls in charge, despite Republicans saying the $1.9 trillion package is too costly. This makes bipartisan support for the relief package more uncertain, but with Democrats now in control of the Senate, they could pass the plan with a simple majority.
The next question investors are probably asking is what implications these fiscal measures would have on monetary policy. The Fed’s ultra-loose policy has been a critical contributor to the equity rally and any signs of tightening prematurely will rattle financial markets.
Rising inflation is already one of the hottest topics for 2021 and some economists have raised the prospects of the Federal Reserve reducing asset purchases. The first two-day FOMC monetary policy meeting of the year occurs on Tuesday followed by a statement and a press conference from Jerome Powell on Wednesday. While inflation could be a medium and long-term challenge facing the Fed, we do not expect a scaling back of asset purchases anytime soon. Policymakers want to avoid tightening financial conditions at all costs while economic activity remains depressed. Hence, do not expect a repeat of the 2013 ‘taper tantrum’ which sent 10-year bond yields almost a full one percentage point higher in three months and dragged the S&P 500 down six per cent in six weeks following the announcement. Any policy mistake could be extremely costly at this stage, especially as valuations are overstretched.
This week is also the busiest in earnings announcements. More than 100 S&P 500 companies are set to report, including big tech names such as Apple, Microsoft, Tesla and Netflix. According to Factset, 86% of S&P 500 companies have reported a positive EPS surprise and 82% reported a positive revenue surprise. If this trend continues through this week, we could easily see new record highs for all three major US indices.
It’s a busy week on the US economic data front with investors watching out for US fourth quarter GDP, personal consumption expenditure, new and pending home sales, durable goods, initial jobless claims and consumer confidence. However, expect data to have a minor influence on markets with the big themes of fiscal and monetary policy, and earnings to dominate over the upcoming days.
