Tracie McMillion, head of Global Asset Allocation Strategy for Wells Fargo Investment Institute:

Markets reacted very positively to recent economic news, with several indices surging ahead to new record highs before they started trailing off a bit on some lighter volumes. The latest economic numbers have been very strong, reflecting the pent-up demand of consumers as vaccinations continue at a faster-than-expected pace and states are rapidly reopening. That’s been evident and the ISM numbers this week that showed that manufacturing remains strong and especially those services that are rapidly gaining ground on the reopening of the in-person business. The job openings data show that there are over seven million unfilled jobs in the U.S., and that’s another sign that the employment market is starting to come back strong, especially in the services area.

Inflation is expected to rise this year, coming off of a deflationary period last year or a period where prices were stable to trailing down. This year, inflation could spike higher in the spring and the summer months in particular, as we see both supply chain disruptions and increased demand from consumers pushing prices higher. Our thoughts are that inflation could rise to near pre-pandemic highs around 2.5% for the full year, with possible spikes in the 3% to 4% range. Longer term, we think that this higher inflation is probably transitory and inflation should settle near the Fed’s target rate of about 2%.

Investors had bid several markets to all-time highs in recent days, including the Dow Industrials Index and the S&P 500, and we characterize those record highs as expected because we’ve seen such large stimulus and easy monetary policy. In fact, our year-end targets give us another 5% to 8% upside in U.S. large cap stocks, but don’t expect them to go straight up. There will be some pullbacks along the way as investors attempt to price future earnings stream. And right now, they’re having a difficult task assessing the contributions from the trillions of dollars in stimulus that have already been distributed and how much of the pending $2 trillion to $4 trillion more in stimulus will likely add to earnings, and then they need to subtract any potential increase in corporate taxes. So monetary policy might need to tighten in the coming quarters if growth and inflation continue to climb.

Well, there has been a rotation in the stocks that are leading the market higher, and that includes a shift away from growth stocks to value stocks and from larger companies to smaller companies. Cyclical sectors like energy and industrials and materials have been among the leaders so far this year, with financials also performing well on higher interest rates. In fact, financials have just surpassed the performance of the technology sector over the last 12 months. But it’s important to note that market breadth or the number of stocks that are rising has been extremely strong. About 95% of the stocks are trading above their 200-day moving averages. And that’s the best we’ve seen since the Great Recession. What that means is that all sectors are moving higher. Just some are playing catch up to some of the high fliers from last year.

The March jobs report showed that the reopening is progressing well, especially in the services sector, as a lot of the job gains were in areas of the economy that have been the hardest hit by the pandemic lockdowns. Restaurants, for example, added 176,000 new employees and construction saw over 100,000 new jobs created. Students returning to schools prompted the hiring of about 190,000 employees in education. We anticipate continued job gains through the spring and the summer months in response to consumers pent-up demand for restaurants and travel and in-person service.