A second consecutive week with gains for major US stock indices, although modest this week, with the US stock market near its record highs. Consolidation is likely, and a correction too. With most of the companies having 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?

For sure the rollout of coronavirus vaccines combined with declining case trends can build momentum for stocks in 2021.

A strong trend that I have mentioned back in late 2020 and is building momentum is small-cap stocks. Mid- and small-caps perform better compared to large-cap stocks, and value investing is another trend worth monitoring in 2021.

Fiscal stimulus though essential to support the economy now has also some negative implications. If a large part of stimulus checks support is directed to buying stocks, then the syndrome of irrational exuberance and wild stock price moves supporting the speculative frenzy may persist. Once this is stopped, logic should return to the stock market. Stocks with good fundamentals at attractive valuation should trade higher and those with unjustified financial key metrics should have a correction.

Key trends to watch are employment, inflation, and consumer confidence. The latter should improve with the rollout of vaccines. And inflation should also pick up with high oil prices.

The best signal that is still a very long prospect to support the economic growth would be the Fed to start increasing gradually the benchmark key rate. It would mean that inflation is picking up, demand for goods and services is also improving, and we know that consumer spending is a cornerstone for high economic growth.

Putting the short squeeze trend aside, short selling is not going to disappear. And speculating trading will also be probably present. Many stocks either go unnoticed or are too hard to get manipulated, and these stocks do not make headlines.

The SPAC mania is worth to be mentioned. Caution is suggested. The excitement in most cases leads to irrational valuations.

Economic News

The Consumer Price Index came in at 1.4%, less than the consensus of 1.5%. Federal Reserve Chairman Jerome Powell mentioned that interest rates will stay at the current low level for quite some time and highlighted the weak labor market growth. He stated, “Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared,”.

The labor market this week showed worse than expected growth. The Continuing Jobless Claims figure of 4.545 M was higher than the consensus of 4.49 M. The Initial Jobless Claims figure of 793 K was also higher than the consensus of 757 K.

The Michigan Consumer Sentiment Index (preliminary) fell to 76.2, well below the consensus of 80.8. Lower personal consumer confidence in economic activity can lead to lower consumer spending and lower economic growth.

The major US stock market indexes closed as follows on Friday February 12, 2021:

• Dow Jones Industrial Average: Close 31458.40, +1.00% for the week, +2.78% Year-to-date

• S&P 500 Index: Close 3934.83 , +1.23% for the week, +4.76% Year-to-date

•  Nasdaq Composite Close 14095.47, +1.73% for the week, +9.37%, Year-to-date

• Russell 2000: Close 2289.36 , +2.51% for the week, +15.93% Year-to-date

Economic events for the week February 15- February 20, 2021:

Important economic data for the next week will be the weekly Initial and Continuing Jobless Claims, the Retail Sales, the FOMC Minutes.

Sources:

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

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