Market walks the walk as Fed talks the talk

  • Stocks reclaim record highs, small caps rebound, energy sector leads as oil soars
  • Fed inflation gauge increases—but in line with estimates
  • This week: Jobs report, home sales, manufacturing

Next week the picture could be much different—especially if this week’s jobs data surprises to the downside—but the Federal Reserve again signaled its commitment to start tapering its economic stimulus program by the end of the year.1

And the stock market was just fine with that—on Friday, at least.

As Fed Chairman Jerome Powell’s eagerly anticipated speech at the Jackson Hole Economic Symposium continued to lay the groundwork for the Fed to begin scaling back its bond-buying program in the next few months, the S&P 500 (SPX) reversed a Thursday pullback to close last week at another record high:

Chart 1: S&P 500 (SPX), 7/12/21–8/27/21. S&P 500 (SPX) price chart. Friday record.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

The headline: Stocks strengthen as Powell sticks to taper timeline.

The fine print: Remember inflation—the thing everyone was talking about before tapering? While the world was waiting for Powell’s speech Friday morning, the Bureau of Economic Analysis published the latest reading for the Fed’s primary inflation indicator: The PCE Price Index increased 4.2% year-over-year in July—its biggest jump since 1991.2 But that was only slightly higher than forecasted (4.1%), and the monthly increase of 0.4% for July was actually lower than June’s (0.5%).

The quote: “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff[.]” Fed Chairman Jerome Powell, noting that the central bank’s tapering plans don’t imply it is also planning to hike interest rates in the near future.3

The scorecard: Small caps staged a rare rebound—the Russell 2000 (RUT) was the strongest major US index for only the second time in the past 11 weeks, enjoyed its best week since March, and surged nearly 3% on Friday:

US stock index performance table for week ending 8/27/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Sector roundup: The strongest S&P 500 sectors last week were energy (+7.3%), financials (+3.5%), and communication services (+2.8%). The weakest sectors were utilities (-2.1%), consumer staples (-1.4%), and health care (-1.2%).

Highlight reel: Trillium Therapeutics (TRIL) +189% to $17.59 on Monday, (SPRT) +34% to $26.33 on Friday (after rallying as much as 203% intraday). On the downside, Cassava Sciences (SAVA) -31% to $80.86 on Wednesday (showing no signs yet of dialing down its volatility), SelectQuote (SLQT) -45% to $7.89 on Thursday.

Futures action: A volatile crude oil market made one of the most dramatic pivots in its history, with October WTI oil (CLV1) rallying 10.6% to $68.74/barrel last week after falling 8.9% a week earlier. After jumping 1.4% to a two-week high of $1,807.80/ounce last Monday, December gold (GCZ1) pulled back—only to shoot up another 1.4% on Friday to close the week at $1,819.50. Biggest up moves: October natural gas (NGV1) +13.7%, October gasoline (RBV1) +12.4%. Biggest down moves: September VIX (VXU1) -7.7%, October milk (DCV1) -2.5%.

Coming this week

Friday’s jobs reports caps a busy week of economic data:

Today: Pending Home Sales
Tuesday: S&P Case-Shiller Home Price, FHFA House Price Index, Chicago PMI, Consumer Confidence
Wednesday: Markit Manufacturing PMI, ISM Manufacturing Index, Construction Spending, Vehicle Sales
Thursday: Trade Balance, Productivity, Labor Costs
Friday: Employment Report, Markit Services PMI, ISM Non-Manufacturing Index

Earnings this week include:

Today: Zoom Video Communications (ZM), Nordson (NDSN)
Tuesday: Copart (CPRT), CrowdStrike (CRWD), Dycom (DY), NetEase (NTES)
Wednesday: Five Below (FIVE), ChargePoint (CHPT), Campbell Soup (CPB), Chewy (CHWY), Okta (OKTA)
Thursday: Broadcom (AVGO), Hewlett Packard Enterprise (HPE), DocuSign (DOCU), MongoDB (MDB), Ooma (OOMA), PagerDuty (PD)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

2021 climbs the charts

Barring a 114-point (2.6%) pullback in the last two days of August, the SPX will bank its seventh-straight up month tomorrow. It’s also on track to log one of its best year-to-date returns through August of the past six decades:4

Chart 3: Top S&P 500 year-to-date returns through August, 1960-2021. 2021 in elite company, so far.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Through Friday, the SPX was up $20.06% this year—which would have made it the sixth-strongest January–August gain since 1960, and the biggest since 1997. Perhaps not surprisingly, exceptionally big rallies in the first eight months of the year were associated with higher-than-average odds of a down September: The SPX lost ground in September in six of the nine other years on this list.


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1 Powell sees taper by the end of the year, but says there’s ‘much ground to cover’ before rate hikes. 8/27/21.
2 The New York Times. Inflation rose again in July, the Fed’s preferred measure of prices shows. 8/27/21.
3 Powell Says Taper Could Start in 2021, With No Rush on Rate Hike. 8/27/21.
4 All figures reflect S&P 500 (SPX) monthly data, December 1959–August 2021. Supporting document available upon request.

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