The yin and yang of the equity markets produced marginally lower large caps and slightly higher small caps by week-end. The TSX fell 1.33% compared to the S&P 500, which declined 13 basis points, Nasdaq retreated 25 basis points while the S&P 400 MidCap index gained .91%, and the Russell 2000 gained just 41 basis points. European stocks continue to struggle with increasing coronavirus caseloads slowing the re-opening. Italy’s FTSE MIB fell 1.45%, the UK’s FTSE lost 1.15%, the DAX declined 1.17%, and the CAC-40 drifted lower by .46%.
The earnings season continues with 25% of the S&P 500 companies reporting results for Q1. Of the companies reporting, 84% have beaten analysts’ estimates in aggregate by over 23%, which is well above the five-year average of 6.9%. If the trend continues, it will be the largest average earnings surprise since 2008, when FactSet began tracking the measure. Of the sectors reporting, nine reported earnings growth led by Financials, Consumer Discretionary, and Materials. Energy and Industrials reported a year-over-year decline. Revenues are also coming well-above expectations, with 77% of the reporting companies exceeding estimates with an aggregate of 2.9%. The five-year average for revenue surprise is just 1%. As with earnings, eight sectors reported revenue, with three sectors led by Industrials, Real Estate, and Energy reporting year-over-year revenue declines.1 As the re-opening continues, it is expected that earnings and revenues will see an improvement in those sectors most impacted by government-mandated closures.
On Thursday, the US National Association of Realtors reported home sales contracting for the second month, falling 3.7% as inventory levels continue to decline. The average home price hit a high of $329,100, an increase of 17.2% over last year, and the average home was on the market for just 18 days, a record low. Single-family homes declined 4.3%, while condos rose 1.4%.2 The Conference Board reported on Thursday that the leading economic indicators increased by 1.3%, confirming the expectation of economic expansion. Further, the Board is projecting year-over-year economic growth could hit 6.2% in 2021.3 The US Labor Department released the initial jobless claims report on Thursday, with claims falling to 574,000 last week from the previous week’s revised 586,000. While the decline in claims was widespread, Texas and New York reported the largest declines in claims. As written in earlier market comments, many employers find it challenging to hire lower-paid workers.4 It was reported that workers receiving extra benefits through the emergency program funded by the federal government rose by 447,704 to 5.6 million. These benefits are available until September. 5
It is generally agreed the re-opening of the economy will translate into strong economic growth for 2021. What is in question is whether or not the expected explosive growth of 2021 will continue into 2022. Initial concerns are surfacing over inflationary pressures, asset bubbles in specific segments of the market, and the cost of the current administration’s agenda, which rattled the market on Thursday. The number of vacant jobs remains stubbornly high as unemployment benefits are increased and extended, removing incentives for low-wage earners to seek employment opportunities.6 As in the past, raising taxes to pay for the various stimulus packages will prove counter-productive and drag on economic growth. Additionally, the political and social divisiveness created by the current environment does not lend itself to a communal effort necessary to return to the level of prosperity once enjoyed.
We continue to be constructive on alternative equity and debt strategies to navigate the political, social, and economic crosscurrents.
Sources:
1 https://insight.factset.com/sp-500-earnings-season-update-april-23-2021
5 https://www.marketwatch.com/story/u-s-jobless-claims-keep-falling-11619095897?mod=economic-report
6 https://fred.stlouisfed.org/series/LMJVTTUVUSM647S
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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