Markets

Let’s take a look at markets over the past week.

It was a great week for the major indices. The tech heavy NASDAQ 100 (blue line) was the top performer, up 8.84% on the week. The S&P 500 (black line), Dow Jones Industrial Average (DJIA – purple line), and the IWM (orange line) – which tracks the Russell 2000 small-cap index were up 5.90%, 5.06%, and 4.15%, respectively.

What caused the market to pull out the rally caps last week?

  1. Inflation expectations printed less than expected. Headline inflation came in at 7.7% year-over-year vs. the 8.2% expected by the market. Core inflation came in at 6.3% year-over-year vs. the 6.6% expected by the market. The Thursday inflation rate sparked a fierce rally on Wall Street because markets have a clearer picture of where the Fed’s hiking cycle is going, and more importantly – when it will end.
  2. Dollar Weakening: The U.S. Dollar Index ($DXY) declined almost 4% last week. A weaker dollar is good news for US equities as US companies operating overseas can protect profits when exchanging foreign currencies to the US Dollar. The major indices contain many multinational corporations that highly benefit from a weaker dollar. The Russell 2000 small-cap contains more domestic US companies that don’t benefit as much from a weaker dollar, explaining the underperformance this week compared to the other indices.
  3. US 10 year yield decline: The US 10 year yield started the week above 4.1% and declined to around 3.82%. The Thursday inflation report is to blame for the decline in yields as the market expects a less aggressive Fed going forward with hopes the report is signaling peak US inflation. The rapid decline in rates props up equity prices due to the cost of borrowing being lower, benefitting tech and other growth companies. The decline in rates explains the overperformance of the NASDAQ 100 which is heavily weighted with technology and growth companies that benefit tremendously from low borrowing costs.

Chart of of the US Dollar Index and the US 10 year yield last week.

Here are the top performing sectors in the S&P 500 last week. Great week for tech, let’s see what happens this week!