A U.S. stock market correction came this week, and surging bond yields were the dominant investment theme. Fed Chair Powell said that higher yields are "a statement of confidence" about the economic recovery. Are we for sure in this economic recovery path yet?

That's why I wrote the following stock market commentary: “Consolidation is likely, and a correction too. With most of the companies have reported earnings and revenue that beat estimates, the question now is what can drive the stock market higher? Profit-taking and concerns about valuation can send stock indices and stocks lower, but what about higher?”

Rising bond yields can send a positive signal for the economy, there I totally agree with the Fed Chair. They however both indicate inflationary pressures and make bonds now more attractive to investors as relatively safer investments compared to stocks. If this trend of rising bond yields is to continue in 2021, then this asset allocation of capital invested from stocks to bonds could continue.

Warren Buffett warned that fixed-income investors “face a bleak future." I disagree, as the bond market is a huge financial market, and prospects have become much better in 2021. If this rising bond yield continues the Fed may have sooner than expected to change its loose monetary policy, another negative factor for the stock market. But on the other hand, any rising interest rates should be supportive of the U.S. dollar.

For the week ending on Friday, February 19, 2021, the major indexes ended lower, with a selloff mostly for tech stocks.

Economic News

News that the $1.9 trillion fiscal stimulus has been passed by the House and now only remains for the Senate to likely (?) pass this huge stimulus bill probably in March should provide support for stocks.

The Chicago Fed National Activity Index (CFNAI), a monthly index designed to gauge overall economic activity and related inflationary pressure, came in at 0.66, higher than the consensus of 0.4.

The S&P/Case-Shiller Home Price Indices, which examines changes in the value of the residential real estate market in 20 regions across the US and serves as an indicator for the health of the US housing market came in at 10.1%, better than the consensus of 9.9%. New Home Sales reported were strong, with a figure of 0.923 M, higher than the forecast of 0.855 M.

Durable Goods Orders were a beat, with a figure of 3.4%, much larger than the consensus of 1.1%. The Gross Domestic Product Annualized( Q4) PREL figure of 4.1% reported was the same as per the consensus.

Positive news this week for the labor market. Continuing Jobless Claims came in at 4.419 M, lower than the consensus of 4.467 M, and Initial Jobless Claims came in at 730 K lower than the consensus of 838 K.

Personal Income came in at 10%, higher than the consensus of 9.5%. Personal Spending was a slight miss with a figure of 2.4%, less than the consensus of 2.5%. The Chicago Purchasing Managers' figure of 59.6 was a miss, as the consensus was a figure of 61.1, but still, it is shows optimism and strength for the overall economic condition in the US.

Overall, the economic data was very positive and supportive the previous week.

U.S. Stock Market Weekly Performance 

The major US stock market indexes closed as follows on Friday February 26, 2021:

• Dow Jones Industrial Average: Close 30932.37 , -1.78% for the week, +1.06% Year-to-date

• S&P 500 Index: Close 3811.15, -2.45% for the week, +1.47% Year-to-date

•  Nasdaq Composite Close 13192.35, -4.92% for the week, +2.36%, Year-to-date

• Russell 2000: Close 2201.05 , -2.90% for the week, +11.45% Year-to-date

Economic events for the week March- March 5, 2021:

Important economic data for the next week will be the weekly Initial and Continuing Jobless Claims, the ISM Manufacturing PMI, the ADP Employment Change, the ISM Services PMI, the Fed's Beige Book, the Nonfarm Payrolls, and the Unemployment rate.

Sources:

https://www.wsj.com/market-data/stocks/us/indexes

https://www.fxstreet.com/economic-calendar