Markets at record highs as infrastructure debate begins
March 29, 2021
A late surge drove the S&P 500® Index to a record high last week, as economic optimism outweighed valuation worries. Investors worry that we could see elevated equity and bond market volatility in this holiday-shortened week, as large institutional investors rebalance portfolios following a quarter that saw strong equity performance and weak bond returns.
Dispersion of performance in the capital markets is wide this year. To date in 2021, the S&P 500 has returned 6%, the Russell 1000 Growth Index is flat, the Russell 1000 Value Index 12%, the Russell 2000 Index 13%, the MSCI EAFE Index 4%, the MSCI Emerging Markets Index 2%, the Bloomberg Barclays US Aggregate Bond Index -3%, High Yield +1% and the 20+Year Treasury -13%.
There were pockets of volatility on Friday due to forced liquidation of positions held by Archegos Capital Management, specifically media stocks and Chinese internet ADRs. The sales cut $35 billion from the market caps of the impacted holdings, including ViacomCBS, Discovery, Baidu and Tencent. Banks are warning of significant losses as a result, driving double-digit percentage losses for Credit Suisse and Nomura. Disorganized unwinds of hedge funds are frequently the trigger for unusual volatility, but don’t necessarily lead to protracted selling.
The Ever Given container ship stuck in the Suez Canal has been partially refloated, but crews continue to work to free it entirely to allow traffic to resume. More than 450 ships are waiting near the canal which sees roughly 12% of global trade pass, further complicating an already stressed supply chain.
President Biden plans separate infrastructure bills totaling more than $3 trillion. The first phase will focus on rebuilding roads and railways, while the second will include child-care, health-care reforms and tuition-free community college. The White House and Congressional Democrats believe they have sufficient support within their party to pass the next economic package unilaterally, though the first phase may be done on a bipartisan basis. To pay for the spending, Democrats will propose the largest federal tax increase since 1942, focused on corporations and wealthy individuals. They are targeting a corporate tax rate of 28% versus the current 21%. President Biden has pledged not to raise taxes on any individual making less than $400,000, though recent suggestions of a value-added tax and a gas tax are more universal.
First-quarter earnings season is approaching, with the current consensus showing 23% growth, the fastest growth in nearly three years. The estimate has improved by nearly 6% this year despite continued uncertainty on Covid-19. A record number of companies in the S&P 500 have issued positive EPS and revenue guidance since Factset began tracking the statistic in 2006. The current estimate for 2021 is for earnings of $175, higher than the $140 from 2020 and $163 from 2019. Investors will be focused on management commentary around reopening momentum, stimulus impact, supply chain challenges and pricing power. The upside trajectory of estimates is critical, given the forward P/E of the S&P 500 (22x) far exceeds the 10-year average (16x).
What to Watch
Volatility could be elevated next week resulting from positioning around quarter-end. Economic data include consumer confidence on Tuesday, pending home sales on Wednesday, PMI data on Thursday and the monthly payroll report on Friday.