Top Weekly Themes
- President Biden Addresses Congress – The president used the platform to outline his plan to expand the role of the federal government as well as the largest tax hike since 1968. His proposal calls for more than $4 trillion of new spending which is being split into two pieces of legislation, the American Jobs Plan, and the American Families Plan. The Jobs Plan is a $2.3 trillion bill focused on U.S. infrastructure, paid largely with corporate tax increases. The recently introduced American Families Plan increases entitlement spending with an extension of the elevated Child Tax Credit, direct childcare payments, free community college, and universal pre-K, as well as other programs. This plan would be partially financed with an increase in the top individual tax rate to 39.6% (where it stood before the tax cut in 2017), a capital gains tax rate equal to the top income rate for households earning more than $1 million, and greater tax enforcement through an expansion of the Internal Revenue Service (IRS). Overall, there were few surprises, but these proposals remain far from a done deal. Given the narrow majorities in Congress, it seems likely the final legislation will be watered down, with respect to both spending and tax increases.
- Economic Data Remains Robust – Last week saw a plethora of economic data releases. The most noteworthy was the first-quarter U.S. Gross Domestic Product (GDP) which grew at a 6.4% annual pace, or 0.10% higher than estimates. The biggest driver of growth was Personal Consumption Expenditures (PCE) which expanded at a 10.7% annual rate, fueled by government stimulus checks and a re-opening economy. Goods, and in particular Durable Goods, drove a large part of the growth with Motor Vehicles and Furnishings as top performers. First quarter GDP was negatively impacted by a drawdown in inventories, likely caused by supply chain disruptions. The Consumer Confidence Index also remains in an uptrend with April coming in at 121.7, compared to 109 in March. This marks the highest level for the Index since the start of the pandemic and closing in on the February 2020 level of 132.6. With the continuation of widespread vaccinations, easing of COVID-19 restrictions, and elevated household savings, we believe there is plenty of fuel left in the tank.
- Fed Keeps its Foot on the Throttle – The Federal Open Market Committee (FOMC) held its April meeting last week and remains firmly committed to its current level of accommodation. During the virtual press conference, Chairman Powell pushed back on assertions that there has been “substantial progress” in the U.S. economy and indicated that the recent upturn in the economy is not enough for the Fed to “start thinking about thinking about” tapering. Powell was questioned about this topic ad nauseum and our biggest takeaway was that, until there is a significant decline in unemployment, the Fed is willing to endure “transitory” increases in inflation. To be sure, the Fed’s dovish stance will likely be tested in the months ahead as many companies have reported elevated inflation pressures during the first quarter earnings season.
|Russell 1000 Value||2.8||21.3||37.2||13.00||12.11||1.84|
|Russell 1000 Growth||5.0||20.8||31.8||27.30||24.52||0.66|
|MSCI EM (Emerging Markets)||3.3||2.3||17.6||12.96||10.10||2.24*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.2)||(2.0)||(1.3)||5.51||2.93||1.67|
|Bloomberg Barclays US High Yield – Corporate||0.3||4.4||9.5||7.19||6.27||4.17|
|Bloomberg Barclays Municipal Bond||(0.0)||0.7||2.8||5.27||3.46||1.15|
|Bloomberg Barclays Global Aggregate x US (Country)||0.6||(5.6)||(2.1)||3.70||1.92||1.05|
|Crude Oil WTI (NYM $/bbl) Continuous||2.2||69.9||100.8||6.0||9.7||82.4|
|Natural Gas (NYM $/mmbtu) Continuous||(7.6)||101.4||82.0||16.1||9.9||5.1|
|Gold NYMEX Near Term ($/ozt)||0.6||(6.5)||(7.2)||13.0||6.9||1,769.7|
|Copper Cash Official LME ($/mt)||11.1||37.6||57.7||19.8||18.1||10652.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.15||1.22||1.18||1.15||1.10||1.16|
|Japanese Yen per U.S. Dollar||113.61||103.25||105.47||112.50||103.31||114.27|
|U.S. Dollar per British Pounds||1.36||1.37||1.30||1.30||1.23||1.38|
Chart of the Week
Earnings Expectations Continue to Rise
- The chart above shows the relationship between the S&P 500 price-to-earnings multiple and earnings expectations over the past five years. While price-to-earnings have been relatively range-bound between 20x-24x since the summer of last year, EPS estimates have repeatedly been revised upwards since the drawdown in March 2020.
- As Q1 2021 earnings season continues, most companies have reported positive results. As of pre-market on April 29, 203 companies within the S&P 500 have released results with over 85% reporting positive EPS vs. projections.
- To show just how high earnings expectations are, the last time S&P 500 NTM price-to-earnings exceeded 22x was in May 2001. It should be noted that the current market environment is much different than that of the early 2000s, and the novel nature of the pandemic has caused numerous “first time since” scenarios.
- Additionally, the market is exhibiting some uncommon behavior as over 95% of stocks within the S&P 500 are trading above their 200-day moving average. This dynamic has appeared in previous cycles, most notably in 1983, 2004, and 2009. Each of these instances had a subsequent correction occur within the following months. However, these market downturns occurred in the early days of multi-year stock advances and did not hinder long-term performance.
- It is our view that the United States economy will continue to strengthen for the foreseeable future due to a successful vaccine rollout and generous fiscal and monetary policy. With this backdrop in mind, a pull-back would likely amount to a short-term correction rather than an end to the bull market.
When Corporate Taxes Rise, REITs Win
President Biden’s proposal to increase the corporate tax rate could be a [relative] win for Real Estate Investment Trusts (REITs). In general, REITs do not have to pay corporate taxes as they are considered a pass-through entity as long as they payout at least 90% of taxable income as dividends to investors. Since REITs are not subject to corporate taxes, an increase in the tax rate would negatively impact non-REIT stocks, reducing their after-tax earnings and increasing the relative attractiveness of REITs. Higher taxes could bring investors back into the space who left the sector following the Tax Cuts and Jobs Act (TCJA) that reduced the Corporate Tax Rate to 21%. As displayed in the charts below, the TCJA had little impact on the Real Estate Sector and provided a much larger benefit to other sectors and the overall index. As we have discussed previously, we do not believe it is advisable to make long-term investment allocation decisions based on unknown political outcomes but the potential for an increase in the corporate tax rate could further support our recommended allocation to REITs.