Investors are showing signs of increasing exuberance, reflecting optimism about a vaccine-fueled global recovery and the changed economics of the post-coronavirus world.
The Dow Jones Industrial Average rose 1.6% for the first week of 2021, marking its fourth-straight weekly gain despite a mob storming the U.S. Capitol Wednesday and a decline in nonfarm payrolls reported Friday.
The advance, which took the 30-stock index past 31000 in just 29 trading days, has been led by banks and energy firms. Bond yields have risen, taking the yield on the 10-year U.S. Treasury note to 1.105%, the highest since March.
When economically sensitive sectors and bond yields rise together, it often signals Wall Street is embarking on the classic reflation trade that anticipates a full-fledged economic recovery. It is important because it can herald rising incomes, stronger results at firms from retailing to manufacturing to technology, and further market gains.
But the blistering, stimulus-fueled rally over the past year may complicate that formula. While the case for economic recovery appears sound and many fund managers expect the market advance to continue, skeptics say stocks remain vulnerable to fallout from the pandemic, including still-high unemployment and questions about the pace of the vaccine rollout. Supercharged gains in assets from some favored stocks to cryptocurrencies to some commodities could turn out to be unsustainable.
