Capital 19 Catch-Up

Wall Street Bounces Back As Powell Calms Inflation Talk and $579 Billion Infrastructure Deal Nears Conclusion

Wall Street bounced back in style last week after experiencing a sizable pullback the week before. Concerns over inflation seemed to fade away as Fed Chairman Jerome Powell testified in congress, and despite a reading late in the week which indicated a further rise in prices. Boosting sentiment was the long-awaited agreement on the new infrastructure bill that will see $579 billion injected into the economy. While the big banks also helped lift the mood by passing their latest stress tests.

The Dow led the way this week, after suffering its worst losing week in six months in the week previous. It jumped 3.4% boosted by the banks and Caterpillar (CAT), while retail component Nike (NKE) also helped the push higher after smashing earnings. The S&P500 slotted into second place after gaining 2.7% for the week, while the Nasdaq brought up the rear with a 2.4% rise. Both the S&P500 and the Nasdaq finished the week at all-time highs, while the Dow remains 2% below its own closing record.

Positivity was high as Fed Chief Powell appeared before the House of Representatives to be questioned by members on the state of the economy. He reiterated the Fed’s current thinking that the recent spike in inflation would remain temporary, while also talking up the economic recovery occurring across the nation. “Since we last met, the economy has shown sustained improvement,” Powell stated. “Widespread vaccinations have joined unprecedented monetary and fiscal policy actions in providing strong support to the recovery. Indicators of economic activity and employment have continued to strengthen, and real GDP this year appears to be on track to post its fastest rate of increase in decades.”

The testimony gave investors reason to allay fears that interest rates would be on the move higher any time soon. In last weeks Fed meeting, Wall Street was shocked when it seemed Fed members were looking to raise rates as early as 2022. However, Powell assured the House he believes that any inflation bumps are temporary and he expects it to settle back around the 2% mark in the longer term. This statement was to come in handy later in the week as the core personal consumption numbers came in at 3.4%, the indexes highest jump since the 1990s. Markets shrugged off the number and stocks continued their rise.

The $579 billion bipartisan infrastructure deal was the most celebrated news of the week. President Biden announced on Thursday that a deal had finally been made between senators from both sides, and all that remained was how it would be paid for. $312 billion of the total amount will go towards transportation, with $109 billion for roads, $66 billion for rail, $49 billion in public transit, and $15 billion for electric vehicle infrastructure. Other investments will be made in power – $73 billion, broadband – $65 billion, and water – $55 billion.

The deal still needs to pass the Senate where many Democrats are disappointed that provisions weren’t made for childcare and education, healthcare and climate change. However, it’s assumed most will vote in favour of the deal with the expectation there will be further deals to come. Paying for the deal by raising taxes on businesses is also out, which was also a welcome relief to shareholders. It’s likely the government will rather focus on collecting taxes from higher earning individuals who are currently avoiding paying their fair share.

Nike was the star of the markets last week as earnings and revenue smashed expectations and guidance easily beat analyst estimates. Nike jumped 15.5% on Friday after revenue doubled in the last quarter to $12.34 billion from a year earlier, and sales in North America doubled to $5.38 billion. The sporting retailer expects full-year sales to hit $50 billion with analyst expecting $48.5 billion. Sales in China were 17% higher after recent boycotts of US brands, while digital sales increased by 41% year on year, and are up by 147% from the same period in 2019. We recommended Nike back on the 2nd of October when the share price sat around the $125 mark. Friday’s bounce saw it hit $154.35 by session close with expectations from analysts for it to hit $180 in the next year.

The bank stocks were also impressive as all 23 financial institutions passed their yearly stress tests. The Federal Reserve announced the banks could easily withstand a severe recession with all remaining above the minimum required capital levels during a hypothetical economic turndown. For the week Wells Fargo (WFC) was the best performer, gaining 9.4%. While Bank of America (BAC) made 6.1%, Citi (C) rose 4.8%, and JPMorgan (JPM) finished 3.1% higher.

In the week ahead all eyes will be focussed on the June jobs numbers with the nonfarm payroll coming out on Friday. Expectations are for 600,000 jobs to have been added in the month. While earnings wise we’ll see reports from Bed Bath and Beyond (BBBY), Constellation Brands (STZ), and Walgreens Boots (WBA).

And a little bit of admin. With most of the country in lockdown, our office in Sydney has been closed for the time being. We’ll all be working from home until restrictions ease. Hopefully this will be in the very near future. But don’t worry, we have access to everything we need at home, including phone lines, however, if you do happen to call and no one answers please leave a voice message so that the relevant advisor can give you a call back.

Stay safe everyone.