Most major equity indices moved higher last week except for the tech-laden Nasdaq, which fell 1.51%, the large-cap Chinese CSI 300 falling 2.5%, and the Shanghai Composite Index dropping .8%. The rotation into value and more cyclical names continued and outperformed growth momentum names for the third straight week. The TSX gained 1.13% on the week, the Dow Jones, which reflects global flows, surged 2.45%, and the S&P 500, driven by domestic investors, added 1.23%. The mid-cap S&P 400 increased 1.66%, whereas the Russell 2000 managed a meager 23 basis points for the week. European markets also showed gains in the week on optimism of economic strength.
Earnings season is quickly ending, with 88% of the S&P 500 companies reporting Q1 earnings to date. Of the reporting companies, 86% have beaten earnings estimates by an average of 22.1%, which outstrips the five-year average of 6.9%. Revenue surprises are also trending higher with 76% percent of the reporting companies beating revenue estimates by 3.7% compared to the five-year average of 1.0%. If both trends for earnings and revenues continue, it will be the second-highest earnings surprise percentage and the highest revenue surprise percentage since FactSet began tracking both metrics in 2008. As was the case reported last week, the industrial sector is the only sector with a negative year-over-year decline in revenues.1
Economic data for the week had a few surprises. Last Monday, the US ISM Purchasing Managers Index (PMI) reported in April a decline to 60.7 from the March report of 64.7, which was below estimates of 65. The decline was attributed to supply chain disruptions resulting in a shortage of inputs constraining production. A reading above 50 indicates economic expansion. The April reading is the 11th consecutive month of growth, with all six of the largest manufacturing industries expanding.2 Factory orders, while rebounding from February, rose 1.1%, falling short of estimates of 1.8%.3 ISM Services index (62.7%) reported on Wednesday also fell short of estimates (64.1%). On Thursday, the US Labor Department said the initial jobless claims fell to 498,000, marking the first time below 500,000 since the beginning of the pandemic. The reported number came in below median estimates and is thought to be an indication of economic recovery.4
However, the big surprise for the week came on Friday with the release of the US Labor Department’s April jobs report. The estimates for April’s new job creation ran upwards of 1 million-plus, and the actual number was 266,000. The unemployment rate increased to 6.1% from 6%. The report baffled economists who collectively thought job growth would be a blowout as COVID restrictions became more relaxed and economic activity picked up. Several sectors contributed to the drag on job growth. Temporary help services lost 111,400, transportation and warehousing lost 74,000, retail lost 153,000, and manufacturing lost 18,000 when economists expected a gain of 54,000. Leisure and hospitality added 331,000 but still far short of the 3 million jobs lost as a result of the pandemic.4
The impact of the additional unemployment benefits and extension until September on the job market should come as no surprise. Most of the job openings are in the lower income levels, and with benefits exceeding what is available in the job market, it should come as no surprise job growth is muted. Until benefits end and people are forced back into the job market, we expect pre-pandemic level employment much later in 2022 if pre-pandemic levels are achievable. We reported in past commentaries of jobs posting going unfiled and as the re-opening accelerates. This trend will continue until benefits are pulled back. We continue to be cautiously optimistic, but unintended consequences of fiscal policies will create headwinds to a return to full economic normality.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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