Recap — Week of April 26, 2021
Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor
|index||wtd||ytd||1 year||3 years||5 years||index level|
|S&P 500 Index||-0.11||11.79||51.83||18.30||17.09||4,180.17|
|Dow Jones Industrial Average||-0.42||11.86||48.15||14.25||16.27||34,043.49|
|Russell 2000 Small Cap||0.41||15.33||91.24||14.77||16.17||2,271.86|
|MSCI Europe, Australasia & Far East||-0.35||7.63||48.25||7.17||9.55||2,288.56|
|MSCI Emerging Markets||-0.51||4.26||54.51||7.89||12.67||1,341.43|
|Barclays U.S. Aggregate Bond Index||0.18||-2.39||0.10||5.34||3.31||2,334.94|
|Merrill Lynch Intermediate Municipal||0.04||0.45||5.99||5.06||3.23||318.56|
As of market close April 23, 2021. Returns in percent.
The markets took a breather last week with most of the major averages flat to slightly down. The Dow Industrials, S&P 500 and NASDAQ all struggled to break even while Small Caps rose between 0.4% and 1.00%. Earnings-related weakness on Tuesday and the machine-driven sell-off on Thursday were enough to cap the markets for the week. Despite jitters on the tax policy front, earnings reports continue to roll in well ahead of expectations and have kept steady upward pressure on analysts’ estimates for the quarter.
Last week we noted the market felt stretched when compared to its recent trading ranges. Over the past eight months the S&P 500 has reached over 16% above its 200-day moving average six times. In each case the “overbought” condition has led to minor sell-offs. This week is hardly a sell-off, so perhaps we have more sideways to slightly lower price action in the coming days.
We’ve discussed “base effects” contributing the upward thrust in current inflation readings. This phenomenon is also taking place in earnings reports as the market is enjoying favorable comparisons with data from a year ago. So far 15% of the S&P 500 has reported first-quarter results, and almost 9 out of 10 of the companies reporting have beat analysts’ profit estimates. On average, companies are reporting earnings that are 24% higher than expected. Yet again it seems that expectations were too dire, or perhaps companies are ahead of their reopening schedules. Regardless, the fundamental drumbeat for the market is strong. So strong in fact, estimates for this quarter’s earnings season, which started with analysts expecting 21% profit growth, have already crept higher to 28%.
Despite the upbeat news out of the earnings season, stock prices have assumed a “meh” attitude toward earnings reports. For instance, the strong quarterly results so far in the financial sector have led to stock prices declining on average -1.1% following earnings reports. This tells us that stock prices for financials, but likely the market in general have moved on, looking for the next “big” thing. One-hundred seventy (170) members of the S&P 500 report this week, including Microsoft, Texas Instruments, Apple and Ford.
Weekly, it seems we are getting results that have rarely if ever been seen in terms of economic indicators. The Atlanta Fed GDPNow tracker in the last two weeks has increased from an already strong 6% annualized rate in the first quarter to an 8.3% annualized rate. Last week initial jobless claims fell to their lowest since the pandemic with 547K of new claims filed which followed the previous week’s sub-600K number. We expect further improvement in these figures, and importantly, the moves only strengthen our portfolio indicators.
One would assume interest rates are higher with all the positive economic news. However, over the last week, and really since their peak in mid-March, rates have been calm and gently retreating lower. Ten-year interest rates in the U.S. started 2021 slightly below 1% and moved up to a high close of 1.75%. Since then they have been trending lower with their eye on 1.50% level. The stimulus-driven new Treasury bond issuance has slowed, and international buyers have been coming back to the U.S. debt markets. We’ve noted in the past that depressed global interest rates would act as a natural regulator for how high U.S. rates can get relative to others.
This week the Bank of Canada reduced its pace of bond buying from C$4 billion to C$3 billion but left its overnight rate stable. This marks the first developed market central bank to reduce accommodation, aka quantitative easing, which results in lower interest rates. U.S. investors should take note as the decision by the BOC could be considered a leading indicator. Despite a less-successful COVID-19 vaccination program and renewed restrictions, the Canadian economic outlook is quite like the U.S. The Canadian economy is expected to grow in a similar fashion to that of the U.S. this year, with growth of 6.5% expected this year and comparable results expected in 2022 and 2023 (3.7% and 3.2%, respectively).
The ECB meeting last week was uneventful, and we expect the same from the Fed this week. However, analysts will be watching the June meeting for both central banks for important updates. As the economic data in the U.S. continues its strong move higher, there will be more pressure on the Fed to adjust its asset purchase program. Chairman Powell last week reassured markets that any changes in policy will be well telegraphed, and changes at least as far as interest rate hikes are concerned won’t take place until inflation sits sustainably above 2%.
Fundamental data flow continues to be strong out of the U.S., and that has kept our indicators pointing higher. With interest rates moving down, investors in both stocks and bonds have been cheering the moves over the last couple of weeks. Positive trends in the vaccination vs. variant race in the U.S. give us confidence that the news flow will remain upbeat. We will enjoy the last week of April before focusing our attention into May. Last year, May brought strong returns amidst the rebound off the pandemic lows. Perhaps we’ll have a bumpier ride this year; however, we expect the primary trend in markets to be higher.
Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.
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