The Navigator | May 2021
In April, the market rose higher amidst the strong backdrop of an accelerating vaccine rollout, good economic news, stronger than expected earnings, dovish Fed messaging and President Biden’s infrastructure and families proposals. The S&P 500 gained 5.2%, its best month since November 2020, while the Dow was up 2.5%, and the Nasdaq gained 5.4%. Returns among sectors varied with REITs, consumer discretionary, communications services and financial sectors outperforming. Although rising oil prices in the last week helped boost energy stocks, the sector finished the month flat. Consumer Staples were also relatively weak, gaining 2.2% in April. Technology stocks gave up some of the gains in the last week, weighed down by a decline in Microsoft despite its better than estimated earnings.
Investors were encouraged by recent economic news. U.S. GDP increased at a 6.4% annualized rate in the first quarter. For three consecutive weeks in April, initial jobless claims held below 600,000 with the third weeks’ claims dropping to the lowest level since mid-March last year before the pandemic. Retail sales grew by 9.8% in March, one of the largest gains in the history of the sector. Although we view March sales levels as unsustainable going forward due to the stimulus lift, we believe that increased household savings (+US$2 trillion since the pandemic began), combined with rapid job growth and fewer restrictions on activity will keep consumer spending strong.
Both producer and consumer sentiments were boosted in April. Signs that the U.S. economy is set to take off are becoming increasingly obvious as the PMI manufacturing index jumped to 64.7 in March. Consumer confidence also surged over the last two months, with the Conference Board Consumer Index rising to 121.7 in April from 109 in March. Though consumer confidence is still slightly below pre-pandemic levels, sentiment has rebounded more quickly than it had following the past few recessions.
Going forward, we believe that in the very near term the economy will remain well-positioned to continue on its current stimulus and vaccination-fueled path. Given more recent bullish data points, we recognize investors may wonder if all the good news is already reflected in the market. Just as we have warned against extrapolating from the rapidly worsening data at the start of the pandemic, we expect the accelerating growth of the U.S. economy to slow down after the summer. On the tactical horizon, market overreaction to strong growth data may be risky. With investors also pushing stocks to all-time highs, valuations soar with the S&P 500’s trailing P/E a robust 31 times earnings – itself a warning sign. Overall, we expect that the current low market volatility will not persist with concerns over rising inflation, fears of possible tax hikes, and investor speculation over Fed stimulus decisions.
NorthCoast Navigator
↓ Valuation | With the market hovering around all-time highs, valuations for equity are high and appear overvalued. P/E ratios increased to 30.6 at the end of April from 29.2 at the end of March. Forward P/E ratio also increased slightly. Inflation adjusted valuation metrics pointed to the same direction with inflation rising.
↑ Sentiment | Driven by abundant cash and strong economic fundamentals, U.S. consumer sentiment continued to improve in April as vaccinations progressed. The University of Michigan consumer sentiment index came in at a revised 88.3, up from 84.9 in March. Producers sentiment also demonstrated brighter lookout with the ISM manufacturing index increased from 60.8 in February to 64.7 in March, the highest level since the early 1980s.
↑ Technical | Technical indicators remain bullish but look stretched. At the end of April, the S&P 500 was 14% above its 200-day moving average, 7% above the 100-day average and 5% above the 50-day average. Volatility is also relatively low indicated by VIX index, which settled at 18.7, compared with 19.4 at the end of last month.
↑ Macroeconomic | The labor market continued to improve and our outlook is even stronger than a month ago due to the passage of the American Rescue Plan and accelerating vaccine distribution. Consumer spending and consumer income data are both record breaking, and personal savings rate surged from 13% in February to 21% in March. The inflation pressures remain a risk to be watched closely.
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As of 4/30/2021. Data provided by Bloomberg, WSJ, NorthCoast Asset Management.
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