Economic Data Watch and Market Outlook
US equities actually cooperated last week and consolidated as predicted, as opposing forces of strong earnings and economic growth versus rising valuations and the potential of higher tax rates kept the major indices in check. The stellar growth in corporate earnings and revenue persevered last week, led by the titans of tech, but individual stock performance was uneven. Apple posted its best revenue surprise in history (+16.0%) on strong iPhone 12 sales but shares were unchanged, as the global chip shortage may be a speed bump in the coming quarters. Amazon on the other hand reported record quarterly profits that were boosted by strong showings from its retail, cloud computer and ad businesses. The strong earnings and revenue growth was also seen from Facebook and Alphabet which helped the famous basket of tech giants outperform the S&P 500 in April, gaining 9.1% versus 5.4%. This is a sharp reversal from Q1 which saw the tech group (Facebook, Apple, Netflix, Microsoft, Amazon, Google, and Tesla) drop by -0.8% contrasted to the 5.8% return from the S&P 500. However, markets are concerned with President Biden’s plan to raise taxes to pay for his proposed $4 trillion spending spree. On the docket are plans to raise capital gains tax (24.0% to 39.6%), the top income tax rate (37.0% to 39.6%) and corporate tax rates (24.0% to 39.6%) among others. Markets will wait to see if moderate Democrats such as Joe Manchin (WV), Krysten Sinema (AZ) and Jon Tester (MN) can derail passage of a new tax bill through “reconciliation”, prompting a comprise for a more modest rise in tax rates.
Heading into next week’s trading sessions, investors would like to see a perpetuation of the strong corporate earnings and economic data reports we have become accustomed to. The schedule has about 25.0% of the S&P 500 reporting and companies of note include food giant Kellogg, GM, Pfizer, CVS Heath, and MetLife. Thus far according to FactSet, with 60.0% of the S&P 500 having reporting, 86.0% have beaten their earnings estimates by an average of 22.8% and the blended earning growth rate is 45.8% (March 31st estimate was 23.8%). Markets hope solid earnings and economic growth will preserve a historic equity market trend seen since 1932. Since President Roosevelt’s first term in 1932, equity markets that rallied during first 100 days in office for a President tended to stay positive for the remainder of the calendar year. Under President Biden, the S&P 500 has risen by 10.9% during the first 100 days and history shows the market has a 93.0% chance of maintaining a gain for 2021.
In looking ahead to the economic calendar next week, expectations are for strong readings from the ISM Services and Manufacturing surveys and the Non-Farm Payroll report. We begin on Monday with April’s report for the ISM Manufacturing Survey which is projected to slid by 0.2 points down to 64.5. This is just a small pullback after hitting its highest level since 1983 in previous reports. New Orders for Factory Goods in March out on Tuesday, is estimated to have risen by 1.8%. The improvement in orders is due to a rebound from the weather induced drop seen in February. Within the report, shipments are projected to jump by 2.8% and inventories are expected to increase by 1.3%.
Wednesday’s release of April’s ISM Services Survey is projected to increase by 0.3 points to 64.0. This is just a slight moderation in growth as the Survey recently hit its highest level since 1997.
We close out the week with the all-important Non-Farm Payroll report for April, that is estimated to show a rise of 1.0 million new jobs sending the unemployment rate down from 6.0% to 5.8%. Additional rounds of fiscal stimulus for employers and the vaccine rollout have bolstered growth throughout the economy.
The Week In Review
U.S. Equities
US equity markets were down last week as the positive sentiment prompted by strong economic data and corporate earnings were tempered by the specter of high corporate and capital gains tax rates.
US Index Performance
- Dow Jones -0.50% MTD +2.78% YTD +11.30%
- S&P 500 +0.04% MTD +5.34% YTD +11.84%
- Russell 2000 -0.23% MTD +2.10% YTD +15.07%
- NASDAQ -0.39% MTD +5.47% YTD +8.34%
Drivers: I) In April, the Conference Board Consumer Confidence Index soared from 109.0 to 121.7. The increase in consumer confidence has been supported by the strong US economic recovery and the sizable increase in vaccine distribution. The improvement in sentiment has essentially erased the decline seen during the pandemic.
II) The first reading of Q1 GDP showed a solid rise of 6.4% on an annual basis. Consumer spending was the largest contributor to growth spending which rose at a 10.7% rate. Spending got a turbo boost from the stimulus provided in December and March, which helped real disposable personal income rise by a record 61.3%. Business consumer spending on durable goods also soared at a pace of 41.4% led by vehicle purchases.
III) In March, Personal Income skyrocketed by 21.2% with much of the increase tied to additional stimulus provided by the American Rescue Plan. The increase in income also boosted personal spending and household savings. Real consumer spending rose by 3.6% in March, while the savings rate jumped from February’s reading of 13.9% to 27.6% last month.
IV) The Personal Consumption Expenditure price index (the Fed’s preferred inflation measure) increased by 0.5% in March, sending the annual rate up from 1.5% in February to 2.3%. The core measure for the PCE price index rose by 0.36% for March, prompting the annual rate to rise from 1.4% seen in February to 8%. The rise in inflation will likely persist over the next few months, due to the low comparisons from April 2020.
V) Equities Month to Date are higher with Large-Cap, Value, REITs, and Com Services leading equity price performance. The laggards for the period are Small-Cap, Growth, Energy, and Consumer Staples
Capitalization: Large Caps +5.38% (YTD +11.61%), Mid-Caps +5.10% (YTD +13.65%) and Small Caps +2.10% (YTD +15.07%). Style: Value +3.94% (YTD +24.87%) and Growth +3.51% (YTD +13.48%). Sector Groups: Energy +0.68% (YTD +31.52%), Financials +6.55% (YTD +23.52%), REITs +8.26% (YTD +17.98%), Industrials +3.58% (YTD +15.33%), Communication Services +6.76% (YTD +15.56%), Materials +5.36% (YTD +15.14%), Consumer Discretionary +6.47% (YTD +11.38%), Technology +5.25% (YTD +7.48%), Information Technology +5.05% (YTD +7.45%), Healthcare +3.94% (YTD +7.21%), Utilities +4.26% (YTD +7.14%), and Consumer Staples +2.01% (YTD +3.62%)
European Equities
The MSCI Europe Index dropped last week after Euro-zone data showed Q1 GDP had contracted in Germany, France, and Italy due to restrictions implemented after another wave of COVID-19 cases.
Drivers: I) The first estimate of Euro-zone GDP for Q1 2021 declined by -2.5% quarter over quarter, which was below the consensus forecast of -1.0%. The decline in economic growth was caused by new social restrictions in Germany, France and Italy caused by another wave of COVID-19 cases, which adversely affected the hospitality and leisure sectors, and the semiconductor chip shortage hurt manufacturing.
II) The April release of the EC sentiment survey showed a sizable improvement of 9.4 points to 110.3. The increase in the survey last month brought the survey above the pre-pandemic level of 103.6 seen in February 2020. The gain in the survey was supported by rises in services and retail confidence which rose by 11.7 points and 9.1 points respectively, despite mini-lock downs prevalent in several countries.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.40% for the week (MTD +4.54% YTD +8.81%).
Asian Equities
Asian markets were mostly lower as economic data out of China showed a moderating of growth, and the BOC’s normalization of its credit policy. The DJ Asia Index was lower by -1.46% for the week, (MTD -0.52% YTD +4.28%).
Drivers: I) In Japan, the April meeting of the BOJ concluded without any change to monetary policy. The BOJ retained its current view of the economy stating, “the economy has pickedup up as a trend,” and revised up its growth estimate for fiscal year 2021 from 3.9% to 4.0%. The bank’s outlook for inflation was lowered by 0.4% due to a decline in mobile phone costs.
II) In China, the report of industrial profit growth for March showed a strong 92.3% jump and 137.3 year over year increase. The outsized rise in profits is due to the low “base effect” and continued strong recovery in the industrial sector. The consistent increase in demand growth and strong industrial pricing have revived corporate sales revenue and industrial profits.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.72% (MTD -1.25% YTD +5.68%), the Hang Seng Index was lower by -1.25% (MTD +1.33% YTD +5.31%) and the Shanghai Composite declined by -0.79% (MTD +0.14% YTD -0.75%).
Fixed Income
Treasury yields were higher last week as sharp rises in US personal consumption and income continued to show the US economy is growing at an accelerating pace.
Performance: I) The 10-year Treasury yield rose last week ending at 1.625% up from 1.557%. The 30-year yield advanced last week finishing at 2.293% rising from 2.236%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.18% last week, MTD +0.79% and YTD -2.61%. The Bloomberg Barclays US MBS TR was higher by +0.00% last week, MTD +0.55% and YTD -0.55%. The Bloomberg Barclay’s US Corporate HY Index rose by +0.20% for the week, MTD +1.09% and YTD +1.95%.
Commodities
The DJ Commodity Index rose last week by +2.85% and is higher month to date +8.30% (YTD +18.50%). Commodity prices rose on the week as industrial metals led by cooper jumped on increasing demand, and agricultural products such as corn are rising on low seeded acreage, rising demand, and dry weather.
Performance: I) The price of oil jumped last week by +2.15% to close at $63.49 and is higher month to date by +7.32% (YTD +30.85%). Oil prices were higher last week and for the month, as solid economic data and corporate earnings show the global recovery is on track which could lead to higher energy demand.
- II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by
+0.53% closing at 91.30 for the week (MTD -2.07% YTD +1.52%). The USD was higher last week as strong economic data and a rise in US rates supported the dollars rise.
III) Gold fell last week due to the rise in US rates, USD, an advancing of the reflation trade and improving global risk sentiment. Gold fell in price by -0.40% last week, falling to $1768.8 (MTD +3.10% YTD -6.66%).
Hedge Funds
Hedge fund returns in April are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy higher.
Performance:
- The HFRX Global Hedge Fund Index is higher by +1.71% MTD (+3.02% YTD).
- Equity Hedge advanced by +3.14% MTD (+5.87% YTD).
- Event Driven is up MTD +1.62% (+3.36% YTD).
- Macro/CTA has advance by +1.19% MTD (+1.72% YTD).
- Relative Value Arbitrage is up by +0.46% (+0.37% YTD).
- Multi-Strategy is higher MTD by +0.42% (+0.11% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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