This edition features our U.S. housing outlook; smarter hydrogen investing; Swatch's prospects in a pricey luxury market; and notes from Johnson & Johnson, Schwab, and AMD.

Last week, we talked about the precious metals having some life, and that continued on Thursday. The U.S. Dollar Index (USD) has declined over the past two weeks, while Treasury yields have rolled over from recent highs. While we believe the greenback and yields have further to run on the upside, the short-term action is bullish for the metals.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

Stocks Inch to New Highs amid New Concerns

Just when anxiety over the market's direction started to intensify, the S&P 500 said, 'I got this,' and ended the 3/26/21 trading week at a new all-time closing high (ATH). Note that the closing price was less than a half-point above the prior ATH set on 3/17/21, which in market terms seems like a lifetime ago.

Last week was a wild affair, as major stock indices saw multiple reversals. After Friday's surge, the S&P 500 actually made a very marginal (less than 1 point) all-time high, though many other indices are still in short-term downtrends.

Wednesday was another disappointing day for stocks, as early gains evaporated. Market breadth fell off a cliff, finishing with NYSE decliners exceeding advancers by 350 issues after hitting a robust +1,700 earlier in the day. The Nasdaq (-2%), the Nasdaq 100 (-1.7%), and the Russell 2000 (-2.3%) once again bore the brunt of the selling, while the S&P 500 (-0.6%) continued to hold up better than the other indices.

Even with indices bobbing around all-time highs, the stock market continues to meander and has not gotten much done of late. That said, successful rotation has kept breadth strong. Most stocks are trading above their long-term support. In the near-term, though, the market is showing some wear and tear.

The stock market has been wracked by rising interest rates, escalating inflation fears, and sharp selling among last year's winning stocks. And for all that, the S&P 500 closed on 3/12/21 with a 5.3% quarter-to-date gain. If that holds, the index in 2021 will more than double its average 2.1% first-quarter gain since 1980. 'If it holds' is a big if, given that stocks staged selloffs in the final weeks of both January and February.

The United States economy is full of innovation. It has to be. Manufacturing industries that dominated the economy decades ago - textiles, televisions, even automobiles, to a large degree - have moved overseas, where costs are lower. Yet the U.S. economy, prior to the pandemic, had expanded to record levels. And now, the U.S. Healthcare industry is mobilizing to improve COVID-19 testing, treatments and vaccines. Consider that U.S. GDP was approximately $1 trillion in 1930 but nearly $22 trillion at the end of 2019. That's growth of 22-times. Meanwhile, the U.S. population has grown less than 3-times during that time span, to 320 million from 120 million. The delta between GDP growth and population growth has been driven in large part by innovation. In addition, the value of listed corporations on U.S. stock exchanges at the end of 2020 was approximately $32 trillion, representing 41% of global equity market capitalization, while U.S. GDP represented only 25% of global GDP. The current low level of interest rates (the benchmark 10-year Treasury bond yield is 1.1%) and the relatively high level of the dollar both attest to the confidence that global investors have in the innovative U.S. economy.

The U.S. economy added 379,000 jobs in January, ahead of expectations. The unemployment rate dropped to 6.2%. Most of the job gains occurred in leisure and hospitality, with smaller gains in temporary help services, healthcare and social assistance, retail trade, and manufacturing. Employment declined in state and local government, education, construction, and mining. The labor market continues to reflect the impact of the pandemic, as the shape and character of the workforce is changing. In February, 22.7% of employed persons teleworked because of the pandemic, up from 21.8% in November; this trend is likely to remain intact through 2021. The current number of jobs is 8.7 million lower than the February 2020 level. The civilian labor force is down 4.5 million from last February, as these workers have given up on finding jobs. On Thursday, the Labor Department reported that another 745,000 people filed initial unemployment claims, and the total of continuous claims was 4.4 million, down from 4.9 million a month ago. The data indicates that the employment environment, while improving, is still under stress -- a point Fed Chairman Powell made in a press appearance Thursday. We expect the unemployment rate will remain high, and the Federal Reserve will keep interest rates low, into 2022.

Our bond/stock asset-allocation model is rendering stocks overvalued against bonds, as interest rates have headed higher. Our model takes into account current levels and forecasts of bond yields, inflation, stock prices, GDP and corporate earnings. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest 0.18 sigma premium for stocks, with a standard deviation of 1.0. The current valuation level is 0.6 sigma premium for stocks, still within one standard deviation of normal. Generally, the model has done a good job of highlighting value. For example, stocks were very attractive compared to bonds in the late 1970s, when benchmark Treasury rates were in the high teens before heading consistently lower over recent decades. The model indicated that stocks were at a sharp premium to fair value prior to the "dot-com" crash of 2001 and also at a premium prior to the Great Recession in 2007-2009. Starting in 2009, the model favored stocks -- another good call. As our chart shows, the market can manage with premiums and discounts for an extended period of time. Equity valuations will likely start to improve once corporate earnings begin to rebound.

This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.

Stocks fluctuated on Friday morning amid continued inflation concerns, a day after Thursday's sharp selloff. The Commerce Department reported that consumer spending rose 2.4% in January after declining in December, helped by government pandemic relief checks and a reduction in new coronavirus cases. The Dow fell 1.0%, the S&P fell 0.1%, and the Nasdaq rose 0.6%. Crude oil traded near $62 per barrel, while gold fell $44 to $1731 per ounce.

Stocks fell on Monday morning on valuation concerns, led by a 2% decline in the Tech sector, though Energy stocks rose amid rising oil prices. Treasury Secretary Janet Yellen said that she would judge the success of the government's planned $1.9 trillion stimulus program on its ability to restore pre-pandemic levels of unemployment, and noted that the resulting increase in debt would be manageable given current low interest rates. The Dow was flat, the S&P fell 0.6%, and the Nasdaq fell 1.7%. Crude oil traded near $61 per barrel, while gold rose $32 to $1810 per ounce.

Earnings Help Support a Stretched Market

The stock market rallied last week, beginning February on a strong note. Tech stocks outperformed blue chips on strong earnings from a handful of megacap technology companies. On Friday, The Dow Jones Industrial Average rose 0.30%, the S&P 500 0.39%, and the Nasdaq Composite 0.57%. For the week, the DJIA climbed 3.89%, the S&P 500 4.65%, and the Nasdaq 6.01%.

Stocks rose strongly on Monday morning amid a jump in silver prices that boosted mining stocks and mixed economic data. The Institute for Supply Management said that its national manufacturing index fell to 58.7 in January, down from 60.5 in December and below the Reuters consensus forecast of 60.0. Meanwhile, the Commerce Department reported that U.S. construction spending rose 1.0% to an annualized $1.49 trillion in December, above the consensus forecast and the highest level since the start of the series in 2002. The Dow rose 0.9%, the S&P 1.5%, and the Nasdaq 2.1%. Crude oil traded near $53 per barrel, while gold rose $15 to $1866 per ounce.