Monthly Market Update - May 2021May 03, 2021
Many companies outperformed earlier forecasts in April, with a fully diversified portfolio rising more than 4%. What will impact the markets in May? The massive re-acceleration in economic activity and the new stimulus package for starters…here are our thoughts.
Spring sprung wonderfully in April and it wasn’t just the warm and sunny weather. With mega-cap tech (Apple, Amazon, Google and Facebook) leading the way, a fully diversified equity portfolio rose more than 4% this past month. The long secular bull market that began on March 23, 2020, continues.
Many companies outperformed earlier forecasts
The steady stream of corporate earnings still being reported from Q1’21 has been nothing short of magnificent with those aforementioned techs just crushing expectations. But they were hardly alone. Banks and industrials, materials and homebuilders, even retailers and airlines – virtually all companies outperformed earlier forecasts.
Only energy, electric utility and health care companies had mixed results. Just as importantly, corporate management guidance for future earnings has been just as strong, leading to a very classic ‘beat and raise’ earnings effect on stock prices. To be sure, this effect will tail off in another week or so and might, maybe, provide for a slight headwind later in the second quarter. But for April it was fabulous.
Massive re-acceleration in economic activity
This shouldn’t be surprising given the massive re-acceleration in economic activity. Real (adjusted for inflation) Q1 GDP was ‘flashed’ (its first report, subject to at least two more revisions) at 6.4%, the second-fastest rate of growth since 2003 and exceeded only by that from Q3’20, the initial bounce from the depths of the Covid-based recession. Believe it or not, nominal GDP (unadjusted for inflation) at $22.05 trillion has now exceeded the 2019 peak of $21.9 trillion. Personal consumption, by far the largest component of U.S. GDP, jumped more than 10%, most certainly catalyzed by past and current economic stimulus packages. Manufacturing data is setting records that date back decades. You can’t even squint and read between the lines and find anything not to like.
Some underlying details add even more to the future economic fire. Even though personal consumption jumped double digits, the jump in actual income was more than double that, leading to a current personal savings rate of more than 20%. Though the aftermath of both Covid and the Great Financial Crisis of 2008-09 will no doubt keep savings rates much higher than the 3-4% levels that marked the decade of the ‘00s, there is a vast amount of capital to fuel the pent-up demand from Covid shut-ins. On the manufacturing side, one drag on the data was a drop in inventory accumulation, meaning that sales are vastly exceeding production. That virtually mandates that future manufacturing will have to ramp up even more strongly, just to stock the shelves at normal levels.
Legislative action on the horizon?
This has zero, zip, zilch to do with anything infrastructure-ish, which I believe will become the true economic story for the decade of the 2020. President Biden has now fully introduced two major such initiatives for legislative action. For those looking for bold, he didn’t disappoint. As one Wall Street pundit stated, he’s ordering ‘everything on the menu’. Clearly that’s the starting point. The ensuing legislative sausage-making will be ugly and tortuous with ebbs and flows that will make tides in the Bay of Fundy* look like a gentle current. I have no idea where the aggregate $4 trillion packages will land, as well as for the proposed corporate and personal income tax increases. But I have zero doubt that something big, very big, will pass in Q3 or Q4. Unlike those tax cuts from ’17 which gave the economy a short-lived sugar-high, they will prove significant and sustainable for many years.
A couple of other notes.
The Federal Reserve seems still ‘all in’ in terms of monetary accommodation.
Though Wall Street will still subject itself to moments of angst over potential inflation, the days when the Fed might seem inclined to lean against the economy looks to be way into the future, perhaps not until mid’23. The U.S. dollar seems back now into a relative downtrend versus other major currencies, which at this stage of the economic cycle is a distinct positive for domestic economic activity and for all ‘risk-based’ assets, like stocks.
Stocks could undergo a temporary over-shoot, though
But even though the stars are aligning beautifully for investors, I will do as I did last month and inject a little shorter-term caution. First and foremost, when the news gets as good as it seems to be right now, stocks, more often than not, undergo a temporary over-shoot. The ensuing correction, should there even be one, at any time in a long secular bull market is fairly benign, often manifest more in terms of time rather than price...and during that time, one should never under-estimate Wall Street’s ability to literally turn on itself and its immediate past optimism. Two of three** potential negative catalysts – inflation and legislative failure – are still high-profile points of debate.
As I suggested above, overly high near-term expectations can lead to near-term disappointments. Even just the fear of being disappointed, even if those expectations are eventually fulfilled or exceeded, can take the Street modestly ‘off the rails’. Nothing will be wrong and nothing will be broken. That’s just the nature of actively traded and, in their own way, highly efficient markets.
That said, a very encouraging (to me) factor is the lack of true bullishness on Wall Street.
The S&P 500 stands now just below 4200, up about 12% so far in 2021. The most bullish of the mainstream Wall Street forecasts was just issued today, by Goldman Sachs at a 4600 level for the end of 2021, about 9.5% above today. Most are in the 4200-4300 area. That’s not bullish! One major ‘player’, Leon Cooperman, pronounced on CNBC this morning his expectation that stock prices will be lower a year from now.
Maybe he’ll be right. But in my opinion, the combination of the ongoing power of the economic re-acceleration and the current/eventual massive policy stimulation will drive stock prices higher, leaving those forecasts in the proverbial dust, thereby forcing the Street to begin its ‘leap-frog’ process of raising forecasted levels, thereby drawing more money off the sidelines. It’s a classic ‘virtuous cycle’.
We remain bullish and over-weight stock allocations relative to client-specific median targets. Our plan now is to embrace any potential stock price correction over the next several months by adding to positions, with a likely emphasis on non-U.S. stocks. But we’re not in any particular hurry to do so. We like where we stand for our clients.
Your comments and questions are always most welcome.
*it is said that the Bay’s incoming high tide is ‘faster than a man can run’, creating a rapids-like effect
**Wall Street has, for now, completely factored out a Covid resurgence. I agree, for now.