Schwab Market Perspective: A Narrow Path Up

U.S. stocks have continued to climb amid optimism about a vaccine-led economic recovery, but it’s a narrow path—buoyant investor sentiment could easily be deflated by bad news. Although global economic growth has struggled, an acceleration in vaccinations in major countries could support stronger growth in the second quarter.

Meanwhile, after months of languishing near record lows, 10-year Treasury yields have risen to their highest level since March 2020, as the bond market focuses on the potential for stronger growth and higher inflation in 2021.

U.S. stocks and economy: Persistent sentiment risk

Optimism remains strong for an economic rebound, as COVID-19 vaccinations continue to roll out. However, with the pace of vaccinations lagging original projections and the virus continuing to spread at record and alarming rates, growth will likely struggle in the near term. Ultimately, herd immunity still represents the light at the end of the tunnel, but the path forward is darkened by efforts to mitigate the spread of the virus.

The labor market faces persistent headwinds. The December U.S. employment report showed a loss of 140,000 nonfarm payroll jobs, the first decline since April 2020. More sectors added jobs than eliminated jobs, but the leisure/hospitality sector took a big hit, accounting for nearly 500,000 job losses (for a more comprehensive look at the report, click here). Despite some overall bright spots, U.S. payrolls still have meaningful ground to make up, as we’re almost 10 million jobs short of pre-pandemic levels.

The labor market’s recovery momentum has slowed

The overall slowdown in the economy has been a side effect of the continued spread of the virus, which has prompted renewed regional lockdowns and restrictions. As a result, consumers have tightened spending in certain areas, which has in turn hurt businesses—especially those in the services sector—and their prospects for survivability.