The rally in equity markets stalled following the impressive rally to record highs, with the S&P 500® Index roughly unchanged over the past two weeks. The total movement over the past two weeks is the tightest since 2016. Many of the factors driving markets remain in place, including vaccine optimism, the economic reopening, and accelerating earnings, though inflation and valuation concerns remain. Stalling momentum is reflected in sentiment indicators, including Global Fear & Greed, AAII Sentiment Survey and CNN Fear & Greed well off the peak levels from mid-April.
The S&P 500 gained 5% in April, the best month since last November, bringing the year-to-date return to 12%. The popular adage, “Sell in May and go away,” is popular because the May-to-October period is historically the weakest six-month stretch of the year, though May has been positive in seven of the last eight years. Given that the 30% return over the past six months has been among the strongest on record, a pause in the rally would not be unexpected or unhealthy.
The supply and demand for shares in the equity market is shifting, with a slowdown in SPAC issuance and a rebound in share repurchases. First quarter buyback announcements of $339 billion is 68% higher than a year ago and the largest number in nearly two years. IPO activity remains robust, but that has been overwhelmed by record flows into equity funds. Households increased their equity holdings to 41% of total financial assets, the largest percentage on record dating back to 1952. The TINA (there is no alternative) principal still applies, however, with interest rates historically low and investment-grade credit spreads at the tightest level since 1997.
Two-thirds through earnings season, the growth rate is nearly 50%, up from 25% at a month ago and 15% at the beginning of the year. The frequency (86%) and magnitude (23%) of earnings beats are at a record level. The full-year estimate is up to $185, up 11% from the beginning of the year and reflecting 32% growth from 2020. For the second-straight quarter, however, impressive beats are not leading to substantial moves in the stock price, suggesting that the good news was largely priced in. Supply chain constraints continue to be a source of concern, as they could limit sales as demand continues to improve.
First-quarter GDP increased by 6.4%, the second-fastest pace since 2003, but slightly below the consensus of economists. Consumers, who represent over 68% of economic activity, accelerated spending by 10.7% in the quarter, with a 24% jump in spending on goods. The pace of growth was limited by a sharp decline in inventories, as companies struggle with the supply chain. Growth should continue to be well above average, as the NY Fed’s Weekly Economic Index reflects a double-digit growth trajectory. Inflation remains a concern, with the PCE deflator showing prices rise 2.3% from a year ago, though core PCE deflator (indicator preferred by the Fed) is just 1.8%. Personal income continues to explode higher, growing 21% in the month, though 34% of all income came in the form of transfer payments from the government. Spending rose just 4%, resulting in another spike in the savings rate and providing “dry powder” for future spending.
Democrats are increasingly open to a bipartisan compromise on the infrastructure legislation, including breaking it down into smaller pieces. The two sides are close to consensus on spending on traditional infrastructure, such as roads, bridges, airports and broadband, with a group of 10 Republicans and 10 Democrats working together. Compromise remains complicated, however, as Republicans are unwilling to roll back Trump’s tax cuts and progressives are firm in support of the social spending programs.
What to Watch
Earnings season begins to wind down but will still be a factor this week. Economic releases include ISM manufacturing on Monday, durable goods on Tuesday, ISM nonmanufacturing and composite on Wednesday and the monthly payroll report on Friday.
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