U.S. equities pushed to new records yet again on Tuesday — the sixth-straight gain for large-cap stocks — as the long post-election uptrend remains undisturbed. It has been nearly 90 days in a row without so much as a 1% drop in the S&P 500. Realized market volatility has dropped to the lowest level in 10 years. The market is exceedingly quiet and complacent.
But beneath the surface, warning signs remain from narrow breadth, extended sentiment, rising odds of a rate hike, and some ominous market history patterns.
In the end, the Dow Jones Industrial Average gained 0.5%, the S&P 500 gained 0.4%, the Nasdaq Composite gained 0.3%, and the Russell 2000 gained 0.3%. Treasury bonds weakened, the dollar was higher, gold finished little changed giving up earlier gains, and oil rose 0.5%.
The two main stories of the day were surprisingly hawkish commentary from Federal Reserve chairwoman Janet Yellen in her regular testimony to Congress, and further evidence that inflation is heating up.
Yellen said the labor market continues to tighten and that it would be unwise to wait too long to raise interest rates again. Echoing her comments, Dallas Fed president Kaplan said it would be best to hike rates sooner rather than later.
Separately, producer price inflation increase 0.6% from last month — double the gain expected to push the annual rate to 1.6%. That’s a level not seen since 2014.
The data points to the risk of a higher-than-expected result for the consumer price inflation report on Wednesday as energy and shelter costs have been running hot. A sudden inflation surge will raise the pressure on the Fed, including one at the March Federal Open Market Committee (FOMC) meeting, and add a new element to the tax reform/infrastructure spending plans being formed in Washington. After all, higher rates will worsen the budget outlook.
Thanks to the backup in yields, financial stocks led the way on net interest margin hopes rising 1.2% as a group. Yield-sensitive stocks including utilities, real estate investment trusts (REITs) and telecoms were the laggards.
General Motors Company (NYSE:GM) gained 4.8% thanks to reports the corporate owner of European marks Citroen and Peugeot could be exploring a potential bid for its Opel unit.
Semiconductor play Amkor Technology, Inc. (NASDAQ:AMKR) fell 8% after an earnings beat largely driven by insurance payouts related to Japanese earthquake damage. Forward guidance was weak, as management highlighted a seasonal slowdown in the smartphone market.
Breadth narrowed again, with just 109 net advancing issues on the New York Stock Exchange — a drop of 81% from Monday’s result. That’s not exactly a shining beacon of confidence on a day stocks hit new highs. In fact, it reflects very narrow and focused buying interest — the type seen during periods of short covering and momentum following typically seen near market tops.
As first mentioned on Monday, SentimenTrader notes that when all four major stock averages hit new highs in unison, since 1980, large-caps have tended to struggle in the three months that followed. They posted an average gain of just 0.3% vs. a gain of 2.4% for any random three-month period.
And on valuation, the S&P 500’s price-to-book ratio is at its highest level since 2004.