Markets continued to trend higher, with the S&P 500 nearing the all-time high set earlier in the month. Growth outperformed value-driven in part by Facebook, Google and Tesla. Trading volumes were light heading into the three-day US Memorial Day weekend. For the week, the TSX managed a gain of 1.43%, the S&P was up by 1.16%, the Nasdaq climbing 2.06%, the MidCap S&P 400 advanced 1.43%, and the week’s big winner was the Russell 2000, jumping 2.43%. In Europe, indices generally were higher, with France’s CAC 40 gaining 1.53% and the UK flat for the week as the pound showed continued strength against the USD for the fifth consecutive week.
As Q1 earnings season ends, the strength of earnings and revenues as economic activity increased with the relaxation of business restrictions provided support, or at least optimism, for equity markets. Year-over-year earnings accelerated at the highest pace since 2010, exceeding estimates by wide margins, in part as expectations were low.1 The quarter’s earnings rebound and revenue growth are being interpreted by some as broad-based economic strength. While growth sectors and tech extended positive results, inflationary fears spurred more cyclical and value sector stocks. Energy and financials started responding late last year and were top performers in Q1. Expectations are for the current trend to last at least until later in the year as re-opening advances both in North America and Europe, which is currently lagging in re-opening.
For the week, the rudderless behavior of the markets followed the mixed economic data. On Tuesday, the S&P CoreLogic Case-Shiller home price index reported yearly home prices in 20 large US cities were up by 13.3% in March. In a separate national index, home prices were up 13.2% on an annual basis.2 The broad-based gain is being attributed to supply-demand imbalance as influenced by migratory trends from the cities to the suburbs and inflationary pressures and expectations for higher interest rates. As confidence erodes, consumers are buying now on the assumption of higher future prices. The Conference Board on Tuesday reported consumer confidence fell marginally (117.2 in May versus 117.5 in April) for the first time in six months amid fears of costs of living and job prospects.3 On Wednesday, the Consumer Price index advanced sharply month-over-month, increasing .8% versus the forecast of .2%. Year-over-year, the increase is running at 4.2%, the highest in over 12 years. The core rate of inflation ex-food and energy was at .9% month-over-month and up 3.6% over a year ago.4 On Thursday, the initial claims as reported by the US Department of Labor was 406,000 versus the previous week of 444,000. Continuing claims for the week ending May 8th were 15,802,126, a decrease of 175,255 from the previous week. A year ago, continuing claims were at 31,578,845.
The persistent trend over the last couple of months is the worry of higher rates and inflation. Economists have always thought that the quantity of money would influence the spending habits of consumers. The low and negative rates of central banks’ policy decisions of the last decade have not resulted in inflation as thought. Consumers have not responded as expected to low interest rate policies. Most recently, the change in consumer behavior is in stark contrast to the previous period. In part, recent inflation is attributed to supply chain disruptions caused by government-mandated shutdowns. Therefore, central bankers generally think most recent inflationary pressures will be transitory until the economy is wholly re-opened when we return to a lower inflationary environment. In the meantime, investors continue to favor equities, especially cyclical sectors, which do well in a rising rate environment.
Sources:
1 https://insight.factset.com/sp-500-earnings-season-update-may-7-2021
2 https://www.marketwatch.com/story/home-prices-rise-at-fastest-pace-since-2005-as-housing-grows-more-expensive-in-every-part-of-the-country-11621948739?mod=economic-report; https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20210525-1381359/1381359_cshomeprice-release-0525.pdf; https://www.marketwatch.com/story/home-prices-rise-at-fastest-pace-since-2005-as-housing-grows-more-expensive-in-every-part-of-the-country-11621948739?mod=economic-report
4 https://www.cnbc.com/2021/05/12/consumer-price-index-april-2021.html
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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