Sightline Weekly Market Update: Economic Re-Opening Lifts Consumer Confidence
On Friday, most of the major indices reversed the week’s gains despite robust Q1 earnings reports. The TSE lost 17 basis points on the week and remains up over 11% year to date. The S&P 500 was flat on the week and, like the TSX, is up over 11% year to date. The Nasdaq lost 39 basis points during the week, influenced by Microsoft’s weakness after the earnings reported beat expectations. The Nasdaq index is trailing the other index increasing 8.34% YTD. The S&P400 mid-cap and Russell small-cap indices, while losing 75 and 24 basis points on the week, YTD are up 18.14% and 14.59%, respectively. European indices were mixed, with the UK and France increasing 45 and 18 basis points with Germany losing .94% and Italy down 1%.
The earnings season continued this week, with FactSet reporting that of the 60% of the S&P 500 companies reporting, 86% reported positive EPS surprises, and 78% reported positive revenue surprises. If the trend continues, the percentage reporting surprises will be one of the strongest on record since FactSet began tracking these metrics. As reported in the same report from FactSet, the estimated earnings growth rate is 23.8% in Q1. More telling about future expectations of those S&P 500 companies willing to provide guidance, 18 companies issued negative guidance while 30 issued positive guidance. From a valuation perspective using 12-month forward earnings, the P/E ratio for the S&P 500 is 22 times versus the 5-year average of 17.9 and the 10-year average of 16 times. The higher P/E is in part a reflection of historic low-interest rates as well as stretch valuations in specific market segments.1
On the jobs front, the US Labor Department released their latest initial claims number for the week ending April 24. The report showed a decrease to 553,000 from the previous weeks upwardly revised number of 566,000. Continuing claims were reported at 16,559,276, a drop from the prior week of 845,874.2
On Tuesday, the Conference Board said consumer confidence jumped to 121.7 from the March level of 109. The Present Situation Index jumped to 139.6 from 110.1. The Present Situation Index reflects consumer assessment of current business and labor conditions. The Expectations Index also rose modestly to 109.8 from April’s reading of 108.3. The Expectations Index measures consumer’s short-term outlook for business, labor, and income conditions. The improvement of consumer outlook is expected as vaccination programs expand and lockdowns become a thing of the past.3 Reported on Friday, Chicago’s Purchasing Managers Index increased to 72.1 from the previously reported number of 66.3 and the median forecast of 65. Core inflation also moved higher to .4% from the median estimates of .3%.4
Last Tuesday and Wednesday, the US Federal Reserve met. In the post-meeting interview, Chairman Powell repeated the Fed policymakers would wait for “some time” before raising rates and will continue with asset purchases at current levels. The markets responded briefly to his additional comments regarding the “froth” in the equity markets.
The fourth wave case numbers are improving on the pandemic front, and outdoor masking restrictions are easing. Mayor de Blasio declared New York City would fully open by July 1 as caseloads decline and the number of vaccinated New Yorkers increase. In the Northwest, however, caseloads are on the rise, and there is a rush to vaccinate everyone.5 Also concerning is the rising number of cases in India where vaccine availability is somewhat limited because of the fight over the intellectual property rights for the recipe of the vaccine.
The equity markets are nervous as we progress through the economic re-opening. As mentioned in the previous commentary, the economic data and fiscal and monetary policies support higher equity prices over time.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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