Economic Update 5-03-2021
- The Federal Reserve meeting last week resulted in no changes in policy, per expectations. Economic data included strong advance GDP results for Q1, as anticipated; and durable goods orders, housing prices, and consumer confidence all experienced growth.
- U.S. equity markets were mixed to lower for the week, outperforming foreign stocks that lost ground in line with a stronger dollar. Bonds fell back as interest rates ticked higher. Commodities gained across the board along with stronger goods demand coupled with some supply concerns.
U.S. stocks reached record highs yet again falling back somewhat by Friday. By sector, ‘value’ segments did well again, with energy up nearly 4% along with stronger crude oil prices, followed by financials and communications. The latter was helped by stronger than expected revenue/earnings news from large constituents Alphabet and Facebook. Real estate also fared positively, despite interest rates ticking higher, but helped by stronger economic data. Info technology and health care lagged, each down a few percent for the week, upon earnings reactions.
Earnings data has come in for roughly 60% of S&P 500 companies, with results the best year-over-year numbers in a decade at the current pace (according to FactSet data), and 86% of firms beating estimates—which itself would be a record if that pace continues. The strongest results are coming from consumer discretionary and financials, with both well over 100%, followed by materials and communications. Notably, revisions continue to be upward, which may explain the more enthusiastic large cap stock valuations, at least from a P/E standpoint. From a free cash flow metric, valuations appear lower.
Foreign stocks performed negatively last week, with still-lagging economic activity due to Covid lockdowns and a stronger U.S. dollar. Eurozone GDP was reported at a -0.6% decline in Q1, which was unsurprising due to the longer period of contained movement and activity compared to the U.S. While the U.K. gained slightly, Europe and especially Japan lost ground, due to earnings weakness in the latter. On the positive side, lockdown easing was announced in France for one, with a goal of the end of June for broader reopening. Emerging markets fared similarly to develop markets, highlighted by weakness in China due to continued crackdowns on fintech firms, and a bit of profit-taking from tech firms generally. There has been rising concern over certain Chinese bonds, especially those in the state-owned enterprise group, coinciding with the government’s attempts to smooth over bad debt. The recent decline in bonds of Huarong AMC, the country’s largest state-owned distressed debt manager, after some delayed reportings, highlights this risk.
U.S. bonds fell back last week, as interest rates ticked higher along with growth coming in stronger than anticipated, leading to higher inflation expectations and investor flows moving away from safety and toward risk. High yield and floating rate bank loans fared better than investment-grade debt, with flattish results for the week. Foreign bonds were down a percent in developed markets, due to the negative influence of a stronger dollar, while emerging market debt was down to a lesser degree.
Commodities rose across the board last week, led by gains up to 3% for agriculture and industrial metals, followed by smaller gains for energy. Precious metals was the sole declining group on the week, as investor risk-taking and higher interest rates outweighed other factors. The price of crude oil rose over 2% to around $63.50/barrel, largely due to shorter-term inventory issues. Generally, expectations for higher inflation tied to stronger economic growth have driven commodities to a recent mini-boom. Corn, for example, has experienced its strongest month in several years as bad weather has been coupled with labor shortages and spiking demand. This has resulted in commodities earning the strongest returns of any asset class over the past year, rewarding patient asset allocators.
|Period ending 4/30/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.18||-2.61|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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