By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: June 25, 2021

Jun 25, 2021 | 3:08 PM

Big Picture

Record-Breaking Week for Nasdaq as North American Indexes Bounce Back

U.S. stocks rose Monday in a broad-based rally that saw the Dow climb by nearly 600 points, its strongest session in over three months. Monday’s moves marked a definitive comeback after last week’s declines spurred by the Fed’s announcement that higher interest rates might come sooner than initially expected. By Monday’s close, the S&P and Nasdaq added 58 and 111 points, respectively, while the TSX added 157 points, thanks to a 4.6%-surge in the energy sector.

U.S. markets finished strong again Tuesday, led by the Nasdaq, which closed at an all-time high as the technology heavy index jumped 112 points. The TSX also finished in positive territory, adding 44. Speaking before Congress on Tuesday, Fed Chair Jerome Powell soothed investor fears even further by reiterating that the recent uptick in inflation should prove to be short-lived.

The Nasdaq notched another record close on Wednesday, but markets were mixed in a quiet trading session. The Dow, S&P and TSX all registered minor losses, while the Nasdaq bucked the trend, adding 18.

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In Canadian economic news, retail sales fell by 5.7% in April from the month prior, while early estimates from Statistics Canada indicated a 3.2% decline in May. Investors, however, took the news with a grain of salt, as many provinces are set to begin reopening their economies.

U.S. stocks climbed once again on Thursday after fresh Labor Department data showed a slight drop in jobless claims to 411,000 – down from last week’s revised estimate of 418,000. It was yet another record close for both the Nasdaq and S&P, which added 98 and 24 points, respectively, while the Dow climbed 323. In Canada, the TSX got back on track, adding 51 points.

Markets Back on Record-Setting Pace

For the four trading days covered in this report, the Dow jumped 906 points to close at 34,196, the S&P 500 added 100 points to settle at 4,266, while the technology heavy Nasdaq surged 340 points to close at 14,370. In Canada, the TSX climbed 215 points to end at 20,215.

Strategy

The Fed has the tools to lean on inflation if need be

The U.S. Federal Reserve’s meeting last week ignited debate over the Bank’s new inflation targeting mechanism and how it will affect future monetary policy actions, and how the policymakers are likely to balance their dual mandate in the future. As is the case in the week following a monetary policy decision, numerous Bank officials are set for public speaking appearances this week to clarify the questions raised last week. Specifically, the Fed revealed a policy preference within the new framework it adopted last August to ensure inflation expectations remain well-anchored at 2%. Chair Jerome Powell is optimistic that supply bottlenecks, viewed as part of why inflation ran as high as it did in April and May, should start to ease over the coming months as the economy reopens. Still, some Federal Open Market Committee members used their dots and forecast projections to suggest that they will respond to inflation risks with higher rates, taking out early insurance and priming market participants for that possibility. On jobs, Mr. Powell was confident that the pre-crisis strength of the labour market would return, and Committee members saw the unemployment rate falling below 3.5% by 2023. Numerous factors, including hesitancy returning to the workplace, childcare responsibilities, and generous unemployment benefits, were cited in explaining the supply-demand imbalance currently evident in the labour market. However, the Fed can do little to speed up vaccination or relocate people whose jobs have been taken by technology or consolidation during the pandemic. If faced with rising inflation risks or structural problems in the labour market, we expect the Fed to react accordingly so it can maintain moderate borrowing costs and keep the recovery on track. However, this is not our base case scenario.

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