Markets Frozen in Place

February 19, 2021

After a series of record-setting sessions, stocks struggled to find direction this week. Another string of strong economic reports – this time from retail sales and industrial output – were not enough to push stocks higher for the week. Investors turned cautious towards week’s end as initial claims for unemployment increased by 13,000 from the prior week to 861,000. That was higher from the previous week’s figures which were revised upwards by 55,000 to 848,000. Given that Covid cases appear to be on the decline, the vaccine rollout is gathering speed, and governments are loosening restrictions, markets grew wary that the continued layoffs suggest businesses are opting to remain lean rather than ramping up as markets had expected. For the week, the Dow rose 0.11%. 

Stimulus Checks Drive Retail Sales Higher

U.S. retail sales kicked the year off on a high note, jumping 5.3% in January. The jump helped break three straight months of falling sales that had been impacted as stimulus support faded, governments imposed tighter restrictions amid a surge in Covid cases, and consumers grew more cautious. The stimulus package passed late last year put an additional $600 in consumers’ hands which allowed them to spend on a variety of goods and services. Big ticket items were in hot demand with spending on electronics and appliances up 14.7% and furniture and home furnishing up 12%. Online shopping also remained popular, rising 11% for the month. Even Covid-battered food and drinking establishments registered healthy gains of 6.9%. With another $1.9 trillion in stimulus being debated, it appears that consumer spending will remain strong for some time as the pandemic abates.

Industrial Production Gathers Steam

Industrial production rose 0.9% in January, the fourth straight monthly gain. Driving the increase was a 1% gain in manufacturing output as well as a 2.3% increase in mining production. Those gains helped offset a decline in output of motor vehicles, which fell -0.7% in January. The car industry has struggled to keep up with demand recently as a global shortage of semiconductors for use in vehicle production has forced carmakers from General Motors to Ford to idle factories. As the global chip shortage eases, industrial output should gather steam once again and enable the sector to retake pre-pandemic highs.

Record-Shattering Lumber Prices Curb Housing Starts 

IFor the first time ever, lumber prices topped $1,000 per 1,000 board feet according to Random Length Lumber Futures for March. The high of $1,004.90 is double the price lumber commanded just three months ago. As a result of the escalating cost of lumber, housing starts fell -6.0% to a seasonally adjusted annual rate of 1.58 million units in January. The drop was led by a -12.2% decline in single-family housing starts which more than offset a 17.1% surge in multi-family. Permits for future homebuilding, which typically lead housing starts by one to two months, defied the rising cost of homebuilding by increasing 10.4% or a rate of 1.881 million units. Much of the gains though were concentrated in the multi-family segment which rose 27.2% compared to the 3.8% increase in single-family. As we head into the typically busy spring and summer homebuying season, we should see continued strong demand despite rising prices given that interest rates remain historically low and given the very lean inventory.
Overall, the week was set up to be another winning one for investors after strong retail spending and industrial production figures added to the recent batch of strong economic reports. Ultimately, however, things just fell flat. The bigger trend is still very supportive for markets with a massive stimulus package on the way, low interest rates, and Covid now appearing to be on the decline. Data from the Centers for Disease Control and Prevention shows that 16.1 million people have received their second dose of the vaccine as of February 18th and at the current vaccination rate we could reach herd immunity this fall. Things are shaping up to be very different than this time last year, and markets are likely to catch some spring fever over the next several weeks.
The Week Ahead
It will be a relatively quiet week for economic data with consumer prices and jobless claims being the highlights of the week.



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