Market Strategy 6/01/2021
Things Can Only Get Better
US equity markets held their ground in May as the US economy is set for its broadest reopening yet
Key Takeaways
- With 98% of companies in the S&P 500 having reported, earnings have risen 50.2% on revenue growth of 10.7%. The consumer discretionary (+208%) and financials (+135%) sectors are driving results with triple-digit percentage gains.
- A slew of economic data this week, including the nonfarm payrolls report on Friday, will provide a clearer picture on the health of the labor market and the trajectory of the recovery from the depths of the crisis.
- Through the end of May value stocks continue to outperform growth stocks by wide margins across the major Russell equity market capitalizations. In our view the resurgence of value stocks since last September represents a broadening in investor appetite for equities and the need for diversification within equity portfolio exposure.
It’s a holiday abridged week that greets investors and leads them via a host of data into the “main event”—the non-farm payroll report at week’s end on Friday. As a number of countries in regions around the world are experiencing viral resurgences and Covid variant outbreaks, others are anticipating or working through their respective re-opening processes as the US finds itself in the midst of a broad economic reopening supported by the recent start of summer weather around the country.
Stadium sports events, airports, highway traffic and other venues to measure normalcy showed significant levels of activity in the US that added to confidence and sentiment as the month of May drew to a close and summer has its unofficial start. It was estimated by some news sources that as many as 2 million travelers on average will have flown each day by the end of the Memorial Day weekend in the US.
Supporting the improved level of sentiment, the US reported the lowest level of infection since the early days of the pandemic and welcomed sports fans back to stadiums.
Two thirds of the way through Q2 much uncertainty remains on a number of levels from variant risk, reopening logistics, supply chain disruptions, inflation risk, domestic political and geopolitical risk and the normal set of uncertainties that make up human existence. That said, from our perch on the market radar screen things look a heck of a lot better than they did a year ago.
While the latest surveys of consumer sentiment have shown concern near-term about inflation, their view for the longer term does not show similar worry. Among business leaders the view remains similarly mixed and often based on which segment of the economy is served by the survey respondent and just how out of whack their business’s supply chains happen to be. We’ll have more details this week on business sentiment with the release of the ISM purchasing managers surveys.
Overall things appear to be getting better rather than worse. It’s not that everything is hunky dory or folks are running around with rose colored glasses but rather that key societal and business components are moving in a more positive direction than in reopening periods prior to now.
In the week ahead a slew of economic data is scheduled for release including data tied to manufacturing, housing, vehicle sales, trends in corporate job cuts, the ADP employment change at mid-week, non-farm productivity, initial jobless claims, the ISM services index and, on Friday, the non-farm payroll change along with the unemployment rate and average hourly earnings. The Fed will release its Beige Book on Wednesday which will provide anecdotal evidence of the health of the economy from the Fed’s regional branch surveys around the country.
With just ten companies of the S&P 500 left to report first-quarter earnings, profits are up 50.2% on back of 10.7% revenue growth. Of course the comparisons year over year were favorable and relatively easy. That said, the results broadly reflected the success thus far of the largesse of the Federal Reserve’s monetary policy stance, the generosity of both the prior and current administrations, and Congress’ fiscal policies, which provided stimulus to working people and businesses over the course of the past year and so far through the current year. Just one sector posted negative earnings growth for the quarter (utilities, which are by many considered one of the most defensive of the 11 sectors).
For many stateside investors the adage “Sell in May and go away” didn’t apply last month with the Dow Jones Industrials (+1.93%), the S&P 500 (+0.55%), the S&P 400 mid-caps (+0.08%), the S&P 600 smallcaps (+1.96%), the Russell 2000 small-caps (+0.11%) and the NASDAQ Composite (-1.53%). With all but one index posting gains for the month, equities exhibited resilience if not high levels of enthusiasm in a period of great transition moving towards an economic recovery marked by uncertainties not atypical exiting a major crisis.
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