Lower Bond Yields, Softer Dollar Give Boost to Stocks

Stocks gained for the second straight week, although it took a late surge on Friday afternoon to get it done. Nevertheless, the S&P 500 Index added 0.6 percent for the week and closed above its 50-day moving average. The index has now climbed 6.4 percent from its February 8 closing low, and sits 4.4 percent below its January 26 closing high.

Contributing to the strength in equities was the better tone in the bond market. After hitting a peak of 2.95 percent on Wednesday following the release of minutes from the Fed’s January meeting, the yield on the ten-year treasury note fell back to end the week at 2.87 percent, relieving some of the anxiety triggered by the inexorable climb in yields since the start of the year. The yield on the two-year note receded for the first time in two weeks – although the move was modest, just 2 basis points from Wednesday’s peak – to end the week at 2.23 percent. But the lower yields, along with strong economic reports and leading indicators, were enough to turn the focus back to stocks and conditions supportive of firming growth and rising earnings.

It has been precisely the cyclical stocks, most sensitive to economic growth, that have rallied the most since stocks began to recover from the correction on Friday, February 9. Technology, financials, materials, and industrials have been the best performers, not surprising since they were among the sectors that declined the most in the downdraft. That laggard group also included healthcare and energy, however, both of which have trailed the market in the subsequent rebound.

Also providing a boost to stocks last week was the softer dollar, which eased off at the end of the week. Since the end of a sustained move lower on February 1, days of dollar strength have mostly proven to be a headwind for stocks, and a tailwind on days of weakness. Expectedly wide trade and budget deficits have led many to expect continued dollar weakness, while others have questioned whether faster growth and signs of firming inflationary pressures might lead to a more aggressive Federal Reserve response than currently anticipated, providing support for the dollar.

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