If there is one common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations or consumers, often poses greater systemic risks than it seems during a boom. – Carmen Reinhart, American economist
Despite a vast amount of potential market-moving news last week, the S&P 500 Index barely budged for the second consecutive week as it closed just one point higher. The Dow Jones Industrial Average and the Nasdaq Composite Index posted modest losses, suggesting that much of the positive news is already priced into the market. It was the busiest week of the first quarter earnings season and the results so far have been impressive with over 80% of S&P 500 companies topping expectations. The big technology companies were in the spotlight last week and they did not disappoint. Apple, Amazon, Alphabet (Google), Microsoft and Facebook all reported revenue and earnings results that easily beat analysts’ estimates. Apple reported another blowout quarter with sales in each product category up by double-digits while Amazon and Alphabet reported sales growth in the quarter of 44% and 34%, respectively. The share price reaction to these strong results, though, was muted, which has been the case for a while now as their influence on the market-capitalization weighted S&P 500 Index has become less as their stock prices remain flattish. Economic reports last week also were mostly favorable and at their monetary policy meeting, the Federal Open Market Committee (FOMC) left interest rates unchanged near zero while striking a dovish tone. Federal Reserve Chairman Jerome Powell commented that the Fed sees faster economic growth and higher inflation ahead but believes that the increase in prices will be transitory. For this reason, the Fed will continue to purchase at least $120 billion of bonds each month as the economic recovery will likely remain uneven due to the uncertain path of the coronavirus pandemic. As for the near-term outlook for the stock market, although valuations do appear stretched despite strong earnings, stock prices seem reasonable relative to historically low interest rates and modest inflation.
For the most part, economic data was positive last week as first quarter gross domestic product (GDP) hit an annualized rate of 6.4%, the best quarter for GDP since the third quarter of 2003 and better than the 4.3% growth in the fourth quarter of 2020. The Chicago Purchasing Manager’s Index (PMI) in April was also better than expected and at the highest level since 1983. The Conference Board’s consumer confidence index hit the highest level since the beginning of the pandemic as the rollout of vaccines has led to optimism over the reopening of the economy. The core personal consumption expenditures (PCE) index for March, which is the Fed’s preferred measure of inflation, rose slightly and is up only 1.8% year-over-year, less than the Fed’s target of 2%. The only negative piece of economic data was March durable goods orders, which increased less than expected due to a decline in orders for transportation equipment.
For the week, the Dow Jones Industrial Average fell 0.5% to close at 33,874 while the S&P 500 Index edged slightly higher by one point to close at 4,181. The Nasdaq Composite Index declined 0.4% to close at 13,962.
The April employment report is expected to show that 975,000 new jobs were created and that the unemployment rate fell from 6.0% to 5.8%. The Institute for Supply Management (ISM) manufacturing and services sector indexes for April are forecast to be comfortably in expansion territory above 60 while March construction spending and factory orders are expected to rebound after declining in February.
Among the most notable companies scheduled to report first quarter earnings this week are CVS Health, Pfizer, Moderna, Becton Dickinson, Cummins, DuPont, Emerson Electric, General Motors, Conoco-Phillips, Dominion Energy, Sysco, Anheuser-Busch InBev, Kellogg, ViacomCBS, Hilton Worldwide Holdings, MetLife and Cigna.
With the calendar turning to the month of May, investors are again faced with the question whether or not to “sell in May and go away”, an especially difficult question to answer this year as the S&P 500 Index has returned 11.8% year-to-date through the end of April while small and mid-cap stocks have performed even better. The hypothesis is that equities tend to underperform in the six-month period from May through October compared to the period from November through April. Accepting this hypothesis as true, investors should then sell their stocks beginning in May, invest the proceeds in cash and then buy their equity positions back at the start of November. With the stock market trading near all-time highs, investors may be more tempted to implement this strategy this year. However, recent data over the last ten years shows that it has been better for investors to stay invested during this time period since stocks have actually been higher over these supposedly worse months. This year might also be different as the Federal Reserve remains very accommodative, fiscal policy continues to be generous with the prospect of additional stimulus and more spending and the economy is reopening faster than expected with the rollout of vaccines. Furthermore, putting this old adage into practice is really a form of market timing, which is a risky strategy and never a good idea. For investors with a long-term time horizon, time in the market is much better than timing the market.