Week in Review: May 7, 2021
May 10, 2021
Recap & Commentary
Markets ended the week with the S&P 500 at a new record high as investors remained focused on 1Q21 earnings reports. In classic bad-news-is-good fashion, markets embraced Friday’s disappointing jobs report as a sign that it will likely dissuade the Federal Reserve from making any near-term changes to monetary policy. To be fair, however, Federal Reserve Chairman Powell has consistently stated that he anticipates no changes to monetary policy for the time being.
On Thursday, the Fed released its semi annual Financial Stability Report which warned that “Asset prices may be vulnerable to significant declines should risk appetite fall.” Though the report did acknowledge the fact that historically low interest rates are contributing to higher valuations for many assets, it noted that “valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields.”
Through Friday, 88% of S&P 500 companies had reported earnings. According to industry group Factset, thus far 86% of companies have beaten their consensus estimate, while 76% have beaten their revenue estimate. Currently, 1Q21 earnings growth is on track to climb 49% which, if achieved, would be the highest rate of growth since 1Q10 when earnings grew 55%.
Economic Bullet Points
Economic data for the week generally failed to meet consensus expectations. Given the recent strength across multiple indicators, it was not necessarily surprising to see consensus expectations become unsustainably high. For the most notable releases, employment and ISM data, April readings did in fact pull back from their prior month levels. However, despite the declines, ISM data remained at levels associated with very strong economic growth
Nonfarm payrolls added just 266K jobs in April, well below the consensus forecast of 978K, and down from the revised 770K jobs added in March; job gains for March were originally reported at 916K. Headline unemployment rose 0.1% to 6.1%. The miss sparked debate about the cause(s) of the weakness. Some argued that current unemployment benefits are creating a disincentive for people to work. Recent research by Bank of America estimated that it would take a job paying at least $32K/year for an individual to be better off than collecting benefits. Others argued that the miss was the result of a lack of child care, inconsistent school schedules and ongoing concerns about the coronavirus. As with so many debates, the truth is likely somewhere in the middle.
Manufacturing and services data released by industry group ISM declined in April but remained at levels associated with strong economic growth. The pullback in both sectors was widely attributed to supply chain constraints and labor shortages, issues that are expected to improve in the coming months.
The trade deficit rose 5.5% in March to a record $74.4B, as US consumer spending benefited from recent stimulus and the broader economic recovery.
Of Note
Based on the results of the 2020 Census, Texas, Colorado, North Carolina, and Oregon all gained seats in the House of Representatives. Because the total is capped, the results are a zero-sum game. California, Illinois, Michigan, New York, Ohio, Pennsylvania, and West Virginia each lost a seat.
Market Indices Week of 05/07
| S&P 500 | 1.2% |
| Small Caps | 0.2% |
| Intl. Developed | 2.5% |
| Intl. Emerging | 0.1% |
| Commodities | 3.7% |
| U.S. Bond Market | 0.3% |
| 10-Year Treas. Yield | 1.58% |
| US Dollar | -1.2% |
| WTI Oil ($/bl) | $65 |
| Gold ($/oz) | $1,832 |
The Week Ahead
- Consumer Inflation (CPI)
- Retail Sales
- Industrial Production
- Small Business Optimism
- Producer Inflation (PPI)
- Consumer Sentiment
- Weekly Jobless Claims
