A spate of good economic news pushed stocks, commodities, and bonds higher last week with the Dow crossing 34,000 for the first time. Large and mid-cap stocks outperformed small caps and the technology-heavy Nasdaq, which are below recent highs. The TSX managed to move higher by 85 basis points, the S&P 500 gained 1.37%, the Nasdaq 1.09%, the S&P 400 Mid-cap index surged 1.93%, while the Russell 2000 added 79 basis points. The major European indices moved higher with Germany’s DAX gaining 1.48%, France’s CAC 40 jumping 1.91%, Italy’s FTSE MIB advancing 1.29% and the UK’s FTSE 100 Index moved up 1.5%. Asian markets were not as accommodating to investors, as China and Japan both incurred modest losses on the week.
This week was the start of first quarter earnings season with Wells Fargo, JP Morgan Chase, and Goldman Sacks posting results exceeding expectations both on earnings and revenue. Helping Wells Fargo and JP Morgan was the release of loan loss provisions for loans that did not unfold.2 According to Factset,3 of the 9% of the companies reporting Q1 results, 81% have beaten EPS estimates, which is above the five-year average of 74%. The reported earnings are 30.3% higher than estimates, which is 6.9% above the five-year average, and if continues, will mark the largest earnings surprise since FactSet began tracking this metric in 2008.
On Thursday, the Commerce Department said March retail sales shot up 9.8%, the second highest increase since 1992, when the government began tracking the data.4 According to CNBC, March sales were expected to increase 6.1% although some economists were expecting an increase of 10%.5 The $1,400 checks from the latest coronavirus relief bill along with an additional $300 boost to unemployment benefits through September from the $1.9 trillion American Rescue Plan, gave households additional spending power. Consumers boosted spending on sporting goods by 23.5%, restaurants and bars by 13.4% and clothing sales increased by 18.3%.4 Also on Thursday, the US Labor Department released the latest initial claims report showing a drop to 576,000, a 193,000 decrease from the previous week’s revised level. Continuing claims also dropped 1,235,856 to 16,934,061. The New York Empire Manufacturing survey reported strong activity with the index jumping 9 points to 26.3, a multi-year high.6 Input prices reportedly are rising, as are selling prices. Also encouraging is the backlog of orders that are reportedly increasing, providing optimism that business conditions will improve with the expansion of the re-opening. The University of Michigan’s preliminary consumer sentiment index7 increased to 86.5 from the March final number of 84.9, a further indication of improving economic conditions. Inflation data for March saw consumer prices rising .06% as the gasoline index continues to rise, representing the largest rise since a .06% increase in August 2012.8 Year over year, the increase for March brought one-year inflation to 2.6%. The global chip supply is plaguing certain sectors like the auto sector where demand is outstripping supply. Inflationary pressures are thought to be transitory as the economy struggles to re-open. On 60 Minutes, the Fed Chairman again repeated policymakers would like to see inflation run for a period above the 2% target for a period.
With fiscal and monetary stimulus along with progress in vaccinations, despite the temporary halt in J&J vaccine production, the outlook for growth for the balance of the year is encouraging. The one caveat is of course the Biden tax plan and the impact on corporate America and the trickle-down effect on the middle class. While the increased corporate tax can be absorbed, the removal of deductions may have the most egregious shock on growth prospects. With interest rates on the 10-year Treasury below the running inflation rate, equities appear to remain attractive in the current environment along with short-term private debt.
2 https://www.cnbc.com/2021/04/14/jpmorgan-jpm-earnings-q1-2021.html; https://www.cnbc.com/2021/04/14/goldman-sachs-gs-earnings-q1-2021.html; https://www.cnbc.com/2021/04/14/wells-fargo-wfc-earnings-q1-2021.html
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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