Top Weekly Themes
- Q1 2021 Earnings Surprise to the Upside – As expected, the COVID-19 pandemic caused a dramatic decline in corporate profits during the first half of 2020. At the beginning of this year, we thought earnings growth would accelerate given the level of monetary and fiscal stimulus, in conjunction with a ramp-up in vaccine distribution. However, the magnitude of earnings growth has exceeded our expectations. Based on data compiled by FactSet Research Systems, Inc. (“FactSet”), approximately 60% of stocks that comprise the S&P 500 Index have reported Q1 2021 earnings as of April 30. Out of this sample, roughly 86% of companies have reported earnings-per-share (“EPS”) that exceeded consensus estimates. The earnings surprise, or the percentage differential between actual earnings and sell-side analyst forecasts, was nearly 23% for this group of stocks. Strong quarterly results have fostered upward EPS revisions for both 2021 and 2022. In the past, we have said that earnings growth, not P/E multiple expansion, would be the primary driver of total return for stocks this year. Thus far, stocks in general have delivered on the earnings front. However, the Biden Administration’s proposal to raise the corporate rate, as well as more arduous year-over-year comparisons as the 2021 pandemic-induced recession becomes a more distant memory, will likely result in less robust earnings growth over the next 12-18 months.
- Lower Yields Thus Far in Q2 2021 Not Supported by Relative Sector Performance – One trend that we saw throughout 2020, was the significant outperformance of growth stocks, especially technology companies when interest rates trended lower. More cyclical value-oriented sectors, such as Financials, Materials, Industrials, and Energy have had a nice tailwind as economic growth has accelerated and interest rates have risen from the lows seen last summer. Interest rates in Q2 2021 have been trending lower since peaking at the end of March. However, cyclical stocks, especially more interest-rate-sensitive Financials, have continued to outperform. Technology and Consumer Discretionary equities, which represent a large percentage of the growth investment universe, have lagged. This may be a short-term market anomaly that will be resolved by either an upward move in rates or more favorable relative returns for growth stocks. However, when sector returns diverge from a previous trend it could signify that the shift in market leadership will likely remain in place at least for the foreseeable future.
- Economic Data Still Quite Strong but Not as Robust Relative to Expectations – Recently released Services and Manufacturing PMI data by U.S. Markit Services and the Institute of Supply Management remained at elevated levels, thus foreshadowing a strong economic recovery. One thing to note is that the Citigroup Economic Surprise Index (CESI), which is still in positive territory, has been moving lower. A positive reading means that economic data has been surprising to the upside and vice versa when the numbers trail consensus expectations. One may question our cyclical tilt in equity portfolios if economic data is not surprising to the same extent when compared to a few months ago. The absolute level, as well as the rate of change of CESI, has not been a reliable signal in terms of predicting broad stock market performance. We continue to believe that the level of fiscal stimulus and improvement on the COVID-19 front will continue to benefit more economically sensitive stocks.
|Russell 1000 Value||(2.1)||16.0||39.2||11.48||12.02||1.86|
|Russell 1000 Growth||1.4||9.9||40.0||22.83||23.23||0.71|
|MSCI EM (Emerging Markets)||(1.1)||6.5||40.3||9.92||14.09||1.82*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.3)||(1.9)||(0.3)||5.35||3.11||1.53|
|Bloomberg Barclays US High Yield – Corporate||0.0||3.0||12.5||7.03||7.51||3.94|
|Bloomberg Barclays Municipal Bond||(0.3)||1.1||4.5||5.21||3.36||0.99|
|Bloomberg Barclays Global Aggregate x US (Country)||(1.4)||(3.7)||4.7||3.71||2.09||0.93|
|Crude Oil WTI (NYM $/bbl) Continuous||1.1||46.4||87.1||3.0||8.2||71.0|
|Natural Gas (NYM $/mmbtu) Continuous||3.3||28.8||98.6||2.5||4.4||3.3|
|Gold NYMEX Near Term ($/ozt)||(6.4)||(6.3)||2.6||11.6||6.5||1,773.8|
|Copper Cash Official LME ($/mt)||(3.9)||21.8||64.4||9.7||15.8||9,427.5|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.22||1.22||1.12||1.16||1.12||1.19|
|Japanese Yen per U.S. Dollar||109.61||103.25||107.25||110.50||104.29||110.23|
|U.S. Dollar per British Pounds||1.41||1.37||1.25||1.33||1.43||1.40|
Chart of the Week: International Stocks Lag as US COVID-19 Cases Fall
US COVID-19 Cases as % of World Cases
International Equity Market Return Relative to US Stocks: 9/1/20-5/7/21
- The first chart illustrates the sharp decline of U.S. COVID-19 cases in relation to total cases worldwide. As of May 5, 2021, approximately 290 million people around the globe have been fully vaccinated. U.S. citizens account for nearly 37% of the total vaccinated population. The United States, at this juncture, has made considerably more progress with the distribution of COVID-19 vaccines as the number of daily cases around the globe reached record levels last month. Many countries have imposed new lockdowns and restrictions that continue to curtail economic activity.
- The second chart shows the relative performance of international equities, as represented by the MSCI EAFE and MSCI Emerging Market indices, compared to U.S. stocks, as represented by the S&P 500 Index. An upward sloping line indicates that international stocks are outperforming and vice versa when the slope of the line is negative. At the beginning of this year, the cyclical recovery had an even more profound effect overseas as the U.S. was dealing with a second wave of COVID-19 cases. However, international stocks have lagged in recent months as the nascent recovery has been hampered by lockdowns and a resurgence of cases across Europe and Asia.
- We think it’s likely that economic activity will accelerate across the globe throughout the back half of 2021. However, the slow progress on global vaccine distribution and uncertainty regarding virus variants presents unknown risks that don’t warrant a change to our existing international equity exposure.
Commentary: Should Investors Be Concerned Over Current Margin Debt Levels?
Some market pundits have been sounding the alarm bells given the expansion of margin debt, which represents capital borrowed to buy stocks. The year-over-year change in margin debt, which is displayed in the chart above, is at comparable levels that precipitated two major bear markets over the past 25 years.
A cursory review of the above-referenced chart may cause some investors to think that a major market sell-off is imminent. However, we don’t think that it’s prudent to make wholesale asset allocation changes given the imprecision involving market forecasts. Also, we don’t think it’s advisable to rely on a sole indicator, especially one with a very limited amount of data points – two in this example. A case could be made that several factors led to each of the past two approximate 50% declines in the market. We are not saying that there is no chance of a severe market decline, but we believe it’s unlikely given the current phase of the economic cycle.
The above chart also does not consider the growth in the equity prices, which is captured in the chart below. We would be more concerned if margin debt was rising at a much faster rate than the price of stocks over a prolonged period, comparable to the market environments of the late 1990s and mid-2000s.