Economic Data Watch and Market Outlook
US equities after rallying four weeks in a row sending major indices to all time highs, hit a bit of turbulence sending stocks on a roller coaster ride. Markets had risen on the back of accommodative fiscal and monetary policy, rollout of the COVID-19 vaccine and strong fund flows into global equities. Goldman Sachs reported Q1 2021 saw a record quarterly net inflow into global equities of $334 billion. But investor concerns over valuations (S&P 500 has rallied 81.6% since March 2020), technical exuberance (95% of S&P 500 stocks were trading above their 200-day moving average) not seen since October 2009, and the sharp increase of new COVID-19 cases in Asia triggered a sell-off on Monday and Tuesday. Buy the dip mentality mid-week sent equities higher, before declining on news that President Biden was set to propose a virtual doubling of the US capital gains tax (20.0% to 39.6%) for wealthy investors earning more than $1 million per year. The measure is intended to partially offset the increased spending proposed in Biden’s American Families Plan, which includes expenditures for healthcare and education. Equity markets rebounded on Friday as investors are anticipating any approved tax increases will be less than proposed, and the parade of strong US economic and earnings data continued.
Heading into next week’s trading sessions, markets seem to be in a tug of war between the positive (accelerating earnings and economic growth data) and negative (potential US tax hikes and risking COVID-19 cases in Asia) factors which will likely have us in a consolidation phase albeit with a commensurate level of daily volatility. The main attraction for the week will be US corporate earnings, with 35% of the S&P 500 reporting. Tesla will be reporting after Monday’s close, with other notables to follow including Google parent Alphabet, Apple, Facebook, Amazon, Boeing, Exxon Mobil and Chevron. Thus far with 25.0% of S&P 500 companies having reported, 84.0% have beaten expectations (above the five-year average of 78.0%) and would be the highest level of beats since FactSet began the data set in 2008. The earnings beat on average have been 23.6%, bringing the blended earnings growth rate to 33.8%, nicely above the 23.8% growth rate estimate from March 31st.
In looking ahead to the economic calendar next week, all eyes will be on Fed Chair Jerome Powell’s comments after the FOMC meeting regarding the Fed’s outlook for the US economy and monetary policy, as well as the release of US housing and PCE data. We begin with Tuesday’s report for April’s reading for the Conference Board Consumer Confidence Index which is projected to increase by 2.3 points to 112.0. The continued rise in the Index from 88.9 in January has come from a sharp improvement in consumer sentiment as the vaccine rollout has eased some of the anxiety related to COVID-19.
Thursday’s release of Q1 GDP is expected to show an increase of 4.5% on a seasonally adjusted annual rate. The economic expansion has been supported by the re-opening of several sectors and businesses, and the rise in consumer spending boosted by recent fiscal stimulus checks. Pending Home Sales also out on Thursday, is estimated to have risen by 2.5% in March, rebounding from the 10.6% decline seen in February due to severe winter weather.
On Friday, US Personal Income for March is estimated to have soared by 20.6% as the receipt of new stimulus checks provided a sizable jump in household income. A related indicator, Consumer Spending, is expected to see a rise of 2.6%. Closing the week with be the PCE Price Index, which is projected to increase by 0.6%, while the core measure is expected to increase by 0.41%. On an annualized basis the headline reading should come in at 2.4%, while the core measure is expected to rise to 1.9% from 1.6% seen in February.
The Week In Review
U.S. Equities
US equity markets were down slightly on the week as the negative sentiment caused by President Biden’s proposal to raise the capital gains tax on the wealthiest American’s was partially offset by strong economic and corporate earnings data.
US Index Performance
- Dow Jones -0.42% MTD +3.30% YTD +11.86%
- S&P 500 -0.11% MTD +5.30% YTD +11.80%
- Russell 2000 +0.41% MTD +2.34% YTD +15.33%
- NASDAQ -0.25% MTD +5.86% YTD +8.76
Drivers: I) In April, the Markit’s PMI Manufacturing survey rose from 59.1 in March to 60.6, while the Services survey jumped from 60.4 to 63.1, with both series new all-time highs. The report confirms an acceleration in economic growth, and manufacturing has been supported by improvements in supply chain delays.
II) For March, Existing Home sales dropped by 3.7% after a decline of 6.3% in February. Housing data has been adversely affected by harsh winter weather and should rebound as conditions improve. Existing home sales may sag for another month or so, as these sales are counted transactions are completed and lag contract signings by a month or two, thus signing disruptions due to poor weather will linger a bit.
III) In March, New Home Sales climbed by 20.7% to 1.021 million units, which exceed the Street consensus which called for a 16.1% rise. The sharp rise in March was welcomed rebound from the 16.2% decline in sales seen in February, caused by the abnormally severe winter weather experienced during the month.
IV) The FOMC meeting next week is expected to be a non-event, with no change in policy expected. Markets anticipate the Fed will acknowledge the acceleration in economic growth and employment, and a rise in inflation. However, it is expected Chairperson Powell will reiterate the Fed’s desire to remain patient in assessing further progress in employment and inflation. Of course, we will look for any clue of a change in forward guidance.
V) Equities Month to Date are higher with Mid-Cap, Growth, Tech, and Information Tech leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Consumer Staples
Capitalization: Large Caps +5.45% (YTD +11.68%), Mid-Caps +5.47% (YTD +14.05%) and Small Caps +2.34% (YTD +15.33%). Style: Value +4.00% (YTD +24.95%) and Growth +4.78% (YTD +14.87%). Sector Groups: Energy -2.95% (YTD +26.77%), Financials +4.01% (YTD +20.58%), REITs +7.03% (YTD +16.64%), Materials +5.28% (YTD +15.05%), Industrials +3.23% (YTD +14.94%), Communication Services +4.74% (YTD +13.37%), Consumer Discretionary +5.87% (YTD +10.76%), Information Technology +7.38% (YTD +9.83%), Technology +7.51% (YTD +9.80%), Healthcare +5.96% (YTD +9.29%), Utilities +4.00% (YTD +6.87%), and Consumer Staples +2.03% (YTD +3.64%)
European Equities
The MSCI Europe Index was lower last week as the prospect of higher capital gains taxes in the US cast a negative pall on the market, which more than offset strong economic data releases from the EU.
Drivers: I) The ECB last week made no changes to policy, nor the bank’s economic outlook. Risk is still seen regarding a downshift in growth, over the near term and remain “more balanced” over the medium term. Regarding inflation, the ECB sees the recent rise in inflation as being caused by temporary factors such as the increase in energy prices. The PEPP program with continue with net purchases of €17bn of assets per week.
II) The April Euro-zone Composite PMI surprises on the upside, rising 0.5 points to 53.7. PMI was expected to fall due to tighter restrictions imposed in Germany and France prompted by the rise in new COVID-19 cases. Across countries, German PMI dropped by 1.3 points but remained solid at 56.0 and France’s PMI rose by 1.3 points to 51.7, its highest level since July 2020.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.09% for the week (MTD +4.96% YTD +9.25%).
Asian Equities
Asian markets were mixed last week due to the sharp spikes in new COVID-19 cases in Japan and India which could lead to new lockdowns and social restrictions. The DJ Asia Index was lower by -0.67% for the week, (MTD +0.94% YTD +5.82%).
Drivers: I) In Japan, March’s Real Export Index rose by 3.1% m/m, recovering from the decline of 3.3% in February. The increase was a partial bound back from the February drop caused in part by the Chinese Lunar Year holiday, but gains were seen across several sectors. Shipments of capital goods increased by 6.5% m/m, with demand increases coming from the US, Euro-zone, and China, particularly for semiconductors.
II) In Taiwan, Industrial Production in March beat expectations by jumping 16.78% on an annualized basis, rising from the 2.52% gain in February. Technology Industrial Production rose by 2.3% m/m in March, following the rise of 2.8% in February. The data set shows further inventory adjustments and strong growth in shipments. Specifically, manufacturing inventories dropped 0.7% m/m, while shipments jumped by 5.2%.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -2.23% (MTD -0.54% YTD +6.44%), the Hang Seng Index was higher by +0.45% (MTD +2.62% YTD +6.65%) and the Shanghai Composite advanced by +1.39% (MTD +0.94% YTD +0.03%).
Fixed Income
Treasury yields were moderately lower last week as recent data releases showed inflation has remained tame, and foreign investors have been sizable purchasers at recent auctions.
Performance: I) The 10-year Treasury yield fell last week ending at 1.557% down from 1.584%. The 30-year yield declined last week finishing at 2.236% falling from 2.275%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.13% last week, MTD +0.97% and YTD -2.43%. The Bloomberg Barclays US MBS TR was higher by +0.00% last week, MTD +0.55% and YTD -0.56%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.03% for the week, MTD +0.88% and YTD +1.74%.
Commodities
The DJ Commodity Index rose last week by +1.55% and is higher month to date +5.45% (YTD +15.38%). Commodity prices were higher last week, as the Biden’s administrations push for “green energy” sent industrial metals higher, led by copper which hit a nine year high in price.
Performance: I) The price of oil fell last week by -1.46% to close at $62.15 and is higher month to date by +5.05% (YTD +28.09%). Oil prices dropped last week as the surge in COVID-19 cases in India and Japan could lower the overall demand for energy.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.78% closing at 90.82 for the week (MTD -2.58% YTD +0.99%). The USD declined on the week, prompted by the accelerating rollout of the COVID-19 vaccine and strong economic data out of the Euro-zone.
III) Gold was down last week as strong US economic data pushed interest rates higher at the end of the week, weighing on the precious metal. Gold fell in price by -0.08% last week, falling to $1775.9 (MTD +3.51% YTD -6.29%).
Hedge Funds
Hedge fund returns in April are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy higher.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.93% MTD (+2.23% YTD).
- Equity Hedge advanced by +1.90% MTD (+4.60% YTD).
- Event Driven is up MTD +0.95% (+2.68% YTD).
- Macro/CTA has advance by +0.11% MTD (+0.63% YTD).
- Relative Value Arbitrage is up by +0.29% (+0.20% YTD).
- Multi-Strategy is higher MTD by +0.26% (-0.50% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet