Market Commentary for the week ending April 17th, 2021
- Stocks worldwide were higher with the S&P 500, Dow, and NASDAQ all at record highs.
- Retail sales surge nearly 10% in the U.S. helped by another round of stimulus checks.
- The biggest financial institutions kicked off earnings season with strong results.
Is the New York Stock Exchange Today’s Buggy Whip?
Coinbase (COIN), a company operating an exchange for investors to invest in and trade cryptocurrency such as Bitcoin, went public on Wednesday and closed the week with a market valuation of $68.1 billion. The company has more than 56 million users and traded $335 billion in the most recent quarter. Early investors in the company paid $0.20 per share for stock in 2013 that is not trading at $342.00 making billionaires of many people.
The incredible performance of Bitcoin, as illustrated in the accompanying graph, has largely driven the success of Coinbase. Bitcoin can be extremely volatile as demonstrated this weekend with it trading on Friday above $64,800 and then on Sunday to a low of $52,149.
Coinbase’s market value of $68.1 billion slightly exceeds the value of the New York Stock Exchange’s parent company Intercontinental Exchange Inc. otherwise known as ICE. Coinbase’s trading volume of $335 billion during the last QUARTER is impressive but pails in comparison to the $199.2 billion traded on the NYSE on FRIDAY (one day!) alone!
Are investors betting Coinbase is the future and the NYSE is the past much like the buggy whip business disappeared with the invention of cars and the demise of horse and buggies? Or maybe the exchanges can all coexist and serve different markets. Regardless, given today’s comparison in trading volumes between Coinbase and the NYSE, with the NYSE trading many multiples the volume of Coinbase, it seems as though Coinbase is going to have to continue to grow at an incredible pace to justify its valuation today.
This Week’s Performance Highlights
Every market around the world, every sector, every major asset class…including bonds, moved higher for the week in what was one of the broadest rallies in some time. At the close of the week the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite stood at all-time record highs while small U.S. stocks are not but still up strongly for the year.
- Large U.S. stocks as measure by the S&P 500 climbed +1.4% for the week followed by the Dow gaining +1.2% and the NASDAQ Composite up +1.1%. The NASDAQ continues to lag behind the other two indexes year-to-date but the gap has narrowed meaningfully in the past few weeks.
- Small U.S. stocks lagged larger stocks still gaining +0.9% for the week. Even though smaller stocks are not sitting at record highs they continue to lead large stocks year-to-date with a gain of +14.8% compared to large stock’s up +12.0%.
- Helping fuel investor confidence is our robust U.S. economy. Fed Chairman Jerome Powell said the Fed expects the economy to accelerate growing at a pace in 2021 not seen since the early ‘80s. A Wall Street Journal survey of economists forecast Gross Domestic Product increasing by +6.4% for the year.
The second quarter earnings season kicked off with the country’s biggest financial institutions reporting results. All 7 of the companies earnings topped Wall Street analysts’ expectations, the “Earnings Surprise” column in the accompanying table. Although this group’s stock performance was mixed for the week, they have performed well year-to-date as interest rates have increased a bit and are expected to help continue fueling more profits.
- It is expected to be a very strong earnings season with analysts forecasting quarterly results will be +24% better than year-ago numbers. Expectations have been improved meaningfully during the last 90 days as the economy picks up steam. For the full year 2021 earnings are forecast to climb +26% and continue higher into 2022.
International market all climbed for the week as well with developed country stocks higher by an average of +1.7%. The strongest of the developed markets this week was Australia rallying +2.9% followed by the Eurozone’s +2.2% gain helped by markets in France, Germany, and Italy. The weakest of the three developed regions both this week and year-to-date is Japan up just +0.4% for the week.
Emerging markets rose +1.5% with Brazilian stocks among the best performers jumping +4.5%. Although Brazil’s market had a good week, it is one of the few markets around the world in negative territory in 2021.
Although China’s stock market was not among the best performers this week up just +0.8% and among the poorer performing in 2021 with a gain of only +1.0%, its economy is booming! In the first quarter China’s economic growth came in a record +18.3% as it continues to recover from the pandemic. It was a very strong quarter but shy of forecasts.
- All three alternative asset classes outperformed even the strong performance of stocks this week with commodities the strongest gaining +3.6% helped by $3+ rally in oil prices. Real estate stocks were up +2.2% and are now higher by +15.1% for the year while gold was the underperformer up just +1.9%.
- The yield on the 10-Year U.S. Treasury bond eased for the second consecutive week closing at 1.584% from 1.660% the week before. This has been welcomed by investors in stocks and is off the recent high of 1.745% at the end of March after a rapid surge from below 1% at the start of the year.
Bernie Madoff, the architect of what people say is the biggest financial fraud in history, died this week at the age of 82 in prison serving his 150 year sentence. Madoff built what was believed to be a very large and successful investment firm but confessed in December 2008 that is was all “one big lie”. Headlines suggest the loss to investors from this classic Ponzi scheme, taking money from new investors to payoff earlier investors, was $64.8 billion but the Securities Investor Protection Corporation (SIPC) estimates the losses to be close to $18 billion. Either way, it is a lesson for all investors to insure there are checks-and-balances in any investment relationship.
As first quarter earnings season ramps up investors are expecting strong numbers from corporate America. Based on current estimates, the biggest gains are expected in the Consumer Discretionary sector, including companies such as Amazon (AMZN), Tesla (TSLA), and Home Depot (HD), where earnings are forecast to grow by +97.7% over the same period last year. As the accompanying graph shows, expectations are high across nearly all sectors with only Industrials and Energy stocks forecast to report earnings slowdowns.
March was a blowout month for retailers with sales surging +9.8% helped by $1,400 stimulus checks for consumers. It was a rebound from the -2.7% slowdown in February following a gap in federal government economic stimulus money and meaningfully better than economists had forecast. May 2020, when sales snapped back from the initial Covid shock, was the only month in history that was stronger.
Auto sales, up +15% for the month, were among the strongest sectors in spite of manufacturers struggling to produce cars due to a chip shortage. Other areas experiencing the biggest gains were sporting goods, clothing, and restaurants up +23.3%, +18%, and +13.4% respectively. Sales are expected to remain strong in coming months but not at the same torrid pace.
There are some signs of inflation with the Consumer Price Index (CPI) jumping +0.6% in the most recent month fueled largely by a rise in energy prices. Excluding food and energy, known as the core CPI, prices were up just +0.3%. The strengthening economy and consumers demand for a wide range of goods and services is putting upward pressure on prices.
Year-over-year prices have climbed at the fastest pace since the fall of 2018 at +2.6% and will likely continue higher for the next few months due to unusual drops in prices last year immediately following the outbreak of Covid. This rising trend in inflation is concerning to investors but it is widely believed the recent acceleration in prices will be temporary.
Industrial Production rebounded in March improving by +1.4% after falling the month before but was only about half the gain economists had forecast. The slower than expected growth for the month was driven by a sharp decline in the output of utilities, down -11.4%, as weather flip-flopped from colder than average temperatures to warmer. Manufacturing grew by +2.7% and mining, including oil and gas exploration, jumped +5.7%.
New home construction improved more than expected from the month before with new starts jumping +19% coming in at an annualized pace of 1.77 million. The strength was across both single-family and multifamily properties. In the Midwest starts more than doubled from the month before, the Northeast and South were also strong, while numbers slowed in the West.
In another sign of an improving employment market, weekly initial jobless claims were the lowest since the outbreak of the pandemic at 576,000. There continue to be problems with reporting and processing of claims but the improving trends is nonetheless welcomed.
Upcoming Economic Reports
- New Home Sales
- Existing Home Sales
- Leading Economic Indicators
- Initial Jobless Claims
- Manufacturing PMI
- Services PMI