Monday Morning QB - Market Observations:
- Strong GDP Report…U.S. Economy Grows at an Annual Rate of 6.7%
- Earnings Season Rolls On With Continued Better Than Expected Results
- Apple, Amazon, Alphabet, Microsoft and Facebook All Reported Better Than Expected Earnings
- Federal Reserve Leaves Interest Rates Unchanged…Discounting Rising Inflation
- U.S. Household Income Surges 21% in March…People Have Money To Spend
- Supply Chain Issues Could Have a Negative Effect on Profits as Companies Struggle To Keep Up With Demand
Monday Morning QB - Market Performance:
Another solid week of earnings reports left the major U.S. indexes mostly lower. However the S&P 500, Nasdaq Composite, and the S&P mid-cap indexes all hit new highs before surrendering their gains late in the week.
The Dow Jones Industrial Average shed 169 points to finish the week at 33,874, a decline of -0.5%. The technology-heavy NASDAQ Composite closed lower for a second week, giving up -0.4%.
By market cap, the large-cap S&P 500 finished flat, while the mid-cap S&P 400 retreated -0.7% and the small-cap Russell 2000 declined -0.2%.
April Summary: The Dow and NASDAQ Composite gained, 2.7% and 5.4%, respectively, while the large-cap S&P 500 rose 5.2%, the mid-cap S&P 400 gained 4.4%, and the small-cap Russell 2000 added 2.1%.
Consumer Spending Helps Lift U.S. Economy Close to Pre-Pandemic Level
The exuberant consumer-driven recovery continues as all reports this week continue to show that stimulus combined with the will to get back out there has jump-started all levels of our economy.
The Commerce Department, last week, released the latest economic update showing the U.S. economy is growing at a 6.7% annual rate, the real gross domestic product (GDP). To give this some context- a solid quarter before the pandemic was anything around 3%.
The jump is, of course, the result of pent-up demand from sheltering in place.
It's not a secret that the recovery has been unequal, depending on your job situation during the heart of the pandemic. However, with extended unemployment benefits and stimulus checks, even some of the hardest-hit Americans have jumped into consumerism, leading to better-than-expected corporate profits and this crazy GDP number.
The first quarter of 2021 saw considerable sales in big-ticket items. The American consumer spent money on everything from houses to cars to furniture. Shopping seemed to be the activity of choice during the worst of the pandemic. Turn the page to a large and growing vaccinated population now eager to spend outside the home, and we have an economy that may see big quarterly numbers well into the future.
Over the past year, we have gone from a rapid decline in our economy to arguably the fastest recovery on record, thanks to the most encompassing response in both fiscal and monetary policy.
The stock market took only a few months to recover from what typically would take years. Consumers spent money, corporate earnings soared, and this culminated in a massive boost to the GDP.
The U.S. economy is in a resurgence stage that has the potential to persist over multiple quarters.
Companies Continue to Beat Both Earnings and Revenue Expectations
Last week was a big week based on the sheer number of S&P 500 companies reporting earnings. Overall, 60% of the companies in the S&P 500 have reported actual results for the quarter. Just like the GDP number, companies continue to produce above expectation.
According to FactSet (Weekly Earnings Insight Report), 86% of the companies have reported actual EPS (Earnings per Share) above estimates, which is above the five-year average of 74%.
As we discussed in last week's MMQB, if earnings beats continue at this pace, it will mark 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 22.8% above the estimates, which is also above the five-year average of 6.9%. If 22.8% is the final percentage for the quarter, it will mark the second-highest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008.
The same solid performance applies to corporate revenues as well. According to FactSet, 78% of S&P 500 companies have reported actual revenues above estimates, which is above the five-year average of 64%.
Suppose 78% is the final percentage for the quarter.
In that case, it will tie the mark (with Q4 2017) for the second-highest percentage of S&P 500 companies reporting a positive revenue surprise since FactSet began tracking this metric in 2008.
With blowout earnings numbers over the last three weeks, it is no surprise that the stock market had a good April.
A Word of Caution
There is one potential issue hiding in the weeds, looking to ruin the party for all of us. I know you are thinking inflation, and you are correct.
When all the goods we want to buy are ready for sale and easily accessible from multiple sources, it is great for the consumer. However, I preferred earlier in the pandemic when more goods were available than money chasing those goods because prices were lower.
Fast forward to today, and supply and demand are now getting out of balance in the other direction. The supply side is finding it hard to keep up with demand. Supply chain disruption is a common market theme right now. The shortage of semi-conductor chips is one prime example.
Servicing our new purchases is becoming increasingly difficult for companies as well. Today's typical response is "we will fix it as soon as the part comes in," which is not what any of us want to hear.
The Federal Reserve says all this is a transitory issue. It's temporary.
Fed Chairman Powell believes that issues or bottlenecks in the supply chain will resolve themselves as workers and businesses adapt. Again, according to Chairman Powell, changes to the current monetary policy are unnecessary. The economy will self-regulate.
Only time will tell what happens with future consumer demand versus future corporate supply.
The effect of our government potentially raising revenue as the stimulus checks fade to memory will likely prove more turbulent than currently modeled.
My guess is that supply and demand factors are not so easily explained away and adjusted for as our Federal Reserve and Wall Street economists would like us to think.
Weighing the Results over the Worry
Our portfolio positions continue to maximize equity exposure based on your risk profile. Inflation fears have been a theme throughout April, but that did not stop the S&P 500 from rising more than 5% for the month.
Strong numbers typically produce strong results. This week is another solid week of earnings reports to digest. We will be watching to see if the "outperformance" trend continues.
If the supply chain issues create a more volatile stock market, it will likely be after earnings season when the news cycle focuses more on worry than data, such as our currently outstanding corporate earnings reports.
Thank you for your trust and confidence in our services. Have a great week!