Market Commentary for the week ending May 1st, 2021
- Corporate earnings surged in the first quarter mostly coming in better than Wall Street expected.
- Reports show a booming economy and surging housing prices.
- China’s market goes negative for 2021 while stocks in the U.S. are higher by +12%.
The first quarter earnings season is stacking up to be one of the best in recent times. Of the 164 S&P 500 companies that reported last week, 144 beat Wall Street estimates (“Earnings Surprise”). Half of the companies that beat estimates did so by +15% or more!
The accompanying table includes the 5 largest S&P 500 stocks that reported last week all with earnings that well exceeded forecasts. Interesting, though, in spite of the big earnings beats, 3 of these 5 stocks were lower for the week and 3 of these 5 stocks have underperformed the market year-to-date.
This Week’s Performance Highlights
- Stocks closed mostly lower during the week in spite of more reports showing the economy is growing rapidly and the majority of companies reporting better than expected earnings for the first quarter.
- At the close of the week, U.S. large stocks were the only major group of stocks to squeak out a small gain of +0.1% as measured by the S&P 500. The Dow Jones Industrial Average and NASDAQ Composite did not fair as well down -0.5% and -0.4% respectively. Small U.S. stocks were lower as well by -0.4%.
- International stocks were lower across the board with developed countries down on average by -1.2%. The worst performing region was Japan declining -2.4% and now in negative territory for the year by -0.2%. The Eurozone held up better with a loss of just -0.9%.
- Emerging markets fell a similar -1.2% with China’s market among the worst performers off -2.8%. It as well is again in negative territory for 2021 as the accompanying graph shows. In spite of reports of their handling of COVID and a strong economy, their stock market has lagged behind the rest of the world this year.
- Real estate stocks extended their strong gains in 2021 rebounding from deep lows in 2020. This week these stocks gained +1.5%, bucking the overall weakness in the market, and are higher by +18.9% year-to-date.
- Commodities were also strong for the week and have had a great year as well gaining +2.4% in the most recent week and higher by +22.5% in 2021. Strength in the price of oil helped last week.
- Gold slipped another -0.4% in the recent week and is lower by -7.1% this year signaling investors’ lack of concern about inflation if this can still be used as such a barometer.
- Bond prices eased as yields inched higher impacted by the reports of a very strong economy. The yield on the 10-Year U.S. Treasury climbed to 1.625% from 1.564% the week before but remains below its recent March high of 1.745%.
According to a recent study published by the CFA Institute (Chartered Financial Analysts), earnings have little impact on stock prices! There analysis of more than 100 years of earnings and stock performance shows the correlation between the two is just 0.2 meaning that, statistically, the two are almost entirely disconnected. After much slicing and dicing of the data, the paper ultimately concludes investors are simply irrational and our animal spirits have the biggest impact on stock prices.
Investors are pouring money into low-cost Exchange-Traded Funds (ETFs) in 2021 adding $246 billion in the first 4 months exceeding the total for all of 2020. At Patton Funds, we have been proponents of these low-cost funds for more than two decades. More investors are embracing this trend for apparently the same reasons we concluded 20 years ago.
Economic activity surged in the first quarter with Gross Domestic Product (GDP) jumping +6.4%. A combination of stimulus checks, increased unemployment benefits, new jobs added, and a general reopening of the economy fueled this strength. One drag on the economy was a depletion on inventories by $147.5 billion. Had manufacturers been able to keep up with the demand during the quarter, growth would have come in at +9%!
Aside from the rebound last year from the depths of the initial COVID shock, this was the fastest quarterly growth since the early 1980’s. Economists expect this strength to continue throughout the year.
Along with the booming economy, Personal Income rocketed higher by a record +21.1% mostly due to stimulus checks. As the accompanying graph shows, we’ve never seen anything like this. This record surge in income drove consumer spending higher by +4.2% with people buying a wide range of things including such big-ticket items such as cars, trucks, and recreational items.
Orders for new durable goods, things that last a year or longer, disappointed in the most recent month up just +0.5% which was less than a quarter of the gain economists forecast. A large part of this disappointing headline number was due to a sharp drop in orders for aircraft. Another constraint in the systems is the inability of manufacturers to get key supplies including computer chips used in cars and countless other products.
Home prices continue their sharply higher trend up another +0.9% nationally in the most recent month and gaining +12.2% over the same period a year ago according to Federal Housing Finance Agency. In a separate report the S&P CoreLogic Case-Shiller home price index of 20 large cites show prices higher by +11.9% over the past 12 months. Cities with the biggest gains include Phoenix, San Diego, and Seattle all up +15% or more. Low interest rates, strong demand, and low inventories are combining to fuel this near record pace of price increases.
Consumer Confidence jumped again higher in April to a 14-month high reading of 121.7 from a revised 109 the month before. Increased vaccinations and falling COVID cases combined with the economy adding new jobs and personal income surging has helped confidence. Although the current reading is strong, it is still a bit shy of pre-pandemic levels.
Upcoming Economic Reports
- Employment Report
- Factory Orders
- Initial Jobless Claims