A stronger than expected jobs report was released on Friday while the market was closed, which is putting futures higher in the premarket. There was some concern that the robust number would cause interest rate and inflation fears to flare up again, but so far, bonds remain relatively quiet.
The strong jobs news combined with a high rate of COVID vaccinations and falling deaths and hospitalizations is creating increased optimism that the economy will return to normal much faster than some had predicted. There are still many warnings from health officials and some politicians, but the recovery seems almost inevitable at this point.
The question now is whether the market can build on the good news as we head into the first-quarter earnings season. The biggest obstacle is likely to be bonds and inflation worries, but we have already seen quite a big of rotation, so it is priced into the market to some degree.
The Fed has attempted to calm the market by stating that there may be some inflationary pressures in the short term as the market ramps back up to prior levels but that it is transitory, and those pressures will fade once the economy is back to 'normal.' Whether the market believes that we will have to wait and see. There is no doubt there are some pricing pressures in various areas of the market
The other big question for market players is whether we will see a return to excellent stock picking that occurred until around the middle of February. Over the last six weeks, there was some very strong profit-taking in small-caps and various themes that drove the market, but that seems to have cooled off last week. Small-caps and some of the key themes like cannabis, gambling, and biotechnology looked much better.
In the short term, we will see if the opening strength is faded. I expected that the recent action had created some strong underlying support and that market participants will be looking to buy some pullbacks. Dip buyers have lost confidence recently, but it should be returning now.
There is plenty of positive economic news out there to drive stocks higher, but fear of inflation and higher interest rates could cause problems if sentiment shifts.