Monday Morning QB - Market Observations:
- So Far, 84% of Companies Who Have Reported Earnings Have Achieved Better than Expected Results
- Workers Filing Jobless Claims Sank to 547,000 – A New Pandemic Low
- Prices of Existing Homes Reaches Record Territory
- March Home Sales Reached Numbers Not Seen Since the Housing Bubble that Led to the Great Recession of 2008 - 2009
- Stock Market Reacted Negatively to Potential Doubling of the Capital Gains Tax Rate for the Wealthy
Monday Morning QB - Market Performance:
Earnings season is off to a great start with companies beating expectations at a record rate.
Add that to economic data showing that our country is coming out of its economic slumber like last week's record housing sector report. It is no wonder why stock market expectations remain high even though the markets finished the week basically flat.
Mid- and small-cap stocks performed better than large-caps, and the technology-heavy NASDAQ Composite Index modestly lagged the broad market.
The Dow Jones Industrial Average finished the week down -157 points, a decline of 0.5%. The technology-heavy NASDAQ Composite ended the week down -0.3%, following three consecutive weeks of gains.
By market cap, the large-cap S&P 500 ticked down -0.1%, while the mid-cap S&P 400 and small-cap Russell 2000 rose by 0.9% and 0.4%, respectively.
The disconnect between record earnings and a flat stock market is concerning and something we will be paying close attention to.
Earnings Season Update – Encouraging Results So Far?
According to FactSet, 25% of the companies in the S&P 500 have reported actual results for Q1 2021 to date. Of these companies 84% have reported actual Earnings per Share (EPS) above estimates.
Let's suppose 84% is the final overall percentage for the quarter. In that case, FactSet is saying that it will tie the mark (with Q2 2020 and Q3 2020) for the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008.
In aggregate, companies are reporting earnings that are 23.6% above the estimates. If 23.6% is the final overall earnings percentage for the quarter, it will mark the largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008.
The S&P 500 index is reporting the highest year-over-year growth in earnings since Q3 2010. Analysts also expect double-digit earnings growth for the remaining three quarters of 2021.
These above-average growth rates are due to a combination of higher earnings for 2021 and a more straightforward comparison to weaker earnings in 2020 due to the negative impact of COVID-19 on numerous industries.
The earnings numbers are strong but not quite to the same degree that the data is currently indicating.
The forward 12-month Price to Earnings per Share or P/E ratio is 22.3, which is above both the five-year average and above the 10-year average. The above-average forward P/E ratio lends support to the idea that the market is overvalued.
The above-average P/E ratio is one indicator people are using to warn against the return of "Sell in May and Go Away" – a once-prominent market theme used to explain poor summer performance for the stock market.
The theory has not been as accurate as of late.
This week is another big week in earnings season as 181 S&P 500 companies (including 10 Dow 30 components) are scheduled to report results for the first quarter.
A few companies to keep an eye on are the big tech companies - Facebook, Amazon, Microsoft, Apple, Alphabet, and Tesla. These are always crucial companies to watch for results. We will keep you posted.
Thanks, as always, to FactSet for providing all the stock market data we rely on during every earnings season.
Why Has My House Increased So Much in Value?
Home buyers are struggling to find existing homes to purchase, given the low inventories across the country.
According to the U.S. Census Bureau, new home sales occurred at a seasonally adjusted annual rate of 1.021 million in March. The report stated that March represented the fastest pace of new home sales since 2006.
Month-over-month, sales rose 20.7%, and, compared with March 2020, sales had more than doubled. The rapid increase in home sales has led to a country-wide shortage of homes (as we noted last week in the MMQB) of around 4 million homes, as reported by Freddie Mac.
Some of the higher demand for homes relates to millennials attaining the age or stage in life where owning over renting is preferable. Also, the pandemic has caused people to rethink their living situations – leaving the crowded urban living of apartments and condos for a home in the suburbs or the country.
Still, there are some headwinds for the housing market too.
Thus far, mortgage rates have fallen in April. If they begin to rise again in the future, this likely will constrain buyers' interest. Also, builders are struggling through shortages of supplies and appliances, driving up the cost to complete houses. We talked about the insane increases in lumber prices in previous MMQB's.
According to Chris Low, the chief economist at FHN Financial, "Right now, though, supply is the biggest limiting factor in home sales. There is a 2.1 month's supply of existing homes at the current sales rate, which is up from an all-time low of 1.9 months last December." A 6-month supply of homes for sale is considered a “Balanced” housing market. "The rise from the low is not because there are more homes for sale; it is because the sales pace slowed," he added.
It is a great sellers' market, but good luck finding a home to rent or buy once your house sells.
For those of you considering using some of the equity to make changes/additions to your existing homes or to reinvest home equity elsewhere – rates are still low, and you probably have the most home equity to draw from in years.
Unfortunately for renters they will struggle to become homeowners. Another reason why you see so many new apartment complexes springing up all around your area.
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Have a great week!