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Earnings Season Expectations Combined with Higher-Than-Expected Retail Sales Fuel Stock Market Gains

Earnings Season Expectations Combined with Higher-Than-Expected Retail Sales Fuel Stock Market Gains

April 19, 2021
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Monday Morning QB - Market Observations:

  • Business Reopenings Spur Consumer Spending Splurge…Retail Sales Jump 9.8% in March
  • Greater than Expected Results from America's Big Banks Kickstart Earnings Season
  • Gasoline Prices Fuel Surge in Consumer Prices
  • Freddie Mac Reports a Housing Shortage – The U.S. is Over 3.8 Million Homes Short of Meeting Current Demand
  • Number of Americans filing first-time unemployment benefits fell by 193,000 to a pandemic low of 576,000
  • Dow Passes 34000 for the First Time
  • Listing of Exchange - Coinbase Global Gives Boost to Digital Currencies

Monday Morning QB - Market Performance:

Robust economic data and better-than-expected bank earnings reports helped catapult most of the major U.S. benchmarks to another round of new record highs.

The Dow Jones Industrial Average added 400 points and finished the week at 34,200, a gain of 1.2%. The technology-heavy NASDAQ Composite gained 1.1%.

By market cap, the large-cap S&P 500 rose 1.4%, while the mid-cap S&P 400 and small-cap Russell 2000 gained 1.9% and 0.9%, respectively.

Bank Earnings Reach Record Highs

The highly anticipated earnings season kicked off last week with a bang as our largest banks reported record earnings. From Bank of America to Black Rock, Wells Fargo, Goldman Sachs, and JP Morgan, all beat their respective earnings targets.

Banks attributed the growth in earnings to both corporate and investment banking activities as well as trading within their own portfolios.

One theme emerging from the solid earnings reports is the "Release of Capital".

Last year, banks had set aside capital to cover bad loans. In expectation of an overwhelming number of families finding themselves in a position of being unable to maintain their monthly debt obligations, banks increased their capital reserves used to cover bad loans.

Thankfully, the expected pandemic-induced loan defaults never materialized. (Stimulus checks were a big help in a substantial way.)

With vaccinations on the rise and more Americans getting back to work, banks no longer feel the need to keep their capital reserves at the current high levels. The capital reserve release will allow the banks to pursue more lucrative business opportunities leading to potentially larger bank profits going forward. 

Increasing Interest rates with more money available means… It's harvest time for the money lenders!

Consumer Spending Shows an Economy on the Mend

For months now the expectation has been the "growth story" once the economy reopens with a vaccinated population.

It predicted that all that pent-up demand for participating in any activity outside of the house with other people will be unleashed on America's marketplace fueling company profits, a return to full employment, and hopefully a booming stock market.

Last week's retail sales number may be a foretaste of what is to come.

The retail sales number is a measure of purchases by us, the American consumer. Last week, the Commerce Department released the March number, which showed a 9.8% increase over February.

The hope is that the rise in activity from February to March is only the beginning

It is hoped that stimulus checks combined with fewer people filing unemployment claims and more and more Americans being vaccinated will lead to several months in a row of blowout numbers. This expectation gives hope for the second quarter GDP number to be above the 8% forecast of many economists.

The increase in retail sales was broad-based. Everything from restaurants and bars to clothing and department stores saw a resurgence in sales.

However, bear in mind there will be some losers as well.

I don't know about you, but I am ready to go to the grocery store less and eat out more. My storage closet will contain a normal amount of paper products going forward as well.

The key drivers of future retail sales will be: keeping the virus numbers declining while vaccinating more people, those people getting back to work and states across America continue to ease up on the Covid-19 restrictions.

Consumer are Paying Higher Prices for Just About Everything

As business activity started picking up in March, so did prices.

The Labor Department reported the consumer price index (CPI) increased by 2.6%, year over year, and 0.6% in March (from February).

The CPI measures what we all pay for everyday items- everything from soup to cars. The increase in the CPI was disproportionately high due to the rapid rise in gasoline prices. Gas prices, on average, jumped 9.1%.

Core CPI, which excludes food and energy, increased 1.6% year over year and 0.3% from February to March. While still a solid increase, the number is below the 2% Federal Reserve Mandate.

The CPI number likely will not change anything as far as the Fed is concerned.

Higher Prices = Bad News for Us but Good News for Companies

The consumer is showing signs of life as we all want to get back to normal, to spend some of that pent-up energy and money caused by the pandemic restrictions.

Consumers getting out there means companies are seeing a surge in demand. Higher demand plus more people chasing the same amount of goods means prices are likely to rise.

When demand is running ahead of supply, the companies have the pricing power, not the consumer.

Another issue for companies is the prices of materials. All those materials needed to make the products we want come with a rapidly increasing price tag, too.

With high consumer demand being met with a materials shortage, prices are being pushed by both supply and demand.

Deep discounts are likely to take a back seat for a while!

We will continue to update the CPI numbers as they are released.

One thing to keep in mind, especially for the year-over-year figure, is last spring and summer we were all cooped up at home sheltering in place.

Comparing a reopening economy versus a shutdown economy (High demand versus No demand) likely will produce numbers that need a higher level of evaluation to be truly understood.

Compared to last year, the jump in consumer prices due to this sudden surge in buying is predicted to be a short-term effect until things level out again.

This is why the Federal Reserve Chairman has said high inflation would be temporary and not require further action from the Federal Reserve—reiterating "No Change" to the "lower for longer" interest rate policy currently enacted by the Federal Reserve.

Inaction by the Fed should help your stock portfolio.

As always, thank you for your trust and confidence in our services. If you have any questions, comments or concerns, do not hesitate to call or email. We are here for you.

Have a Great Week, everyone!

(sources: all index return data from Yahoo Finance; Reuters, Barron's, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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