Breakaway

Breakaway.  Stocks rose and the S&P500 landed a new record on solid earnings and great GDP print.  Rising bond yields did not sit well with growth stock investors.

N O T E W O R T H Y

Good on you.  It was hard to determine what information to focus on yesterday.  The night before, President Biden announced details of his $1.8 trillion American Families Plan.  It was, sort of, the second part of his infrastructure plan, focused primarily on soft infrastructure. The logic is that a strong, healthy, and educated workforce with a stable home life would ultimately create productivity gains.  Sounds good, though the numbers may be difficult to prove, as do many sweeping spending initiatives… regardless of party affiliation.  One thing appears for certain, the Government will be writing checks, which investors generally like.  The hitch is that the President is hoping to pay for the party with increases in taxes, which investors almost always… don’t like.  There are no guarantees that his proposed tax hikes (mainly focused on top earners) on capital gains and income will pass through Congress, but the intent is certainly out there.  Markets generally ignored the news as it was largely expected.  On the earnings front, the expectations beaters parade continued yesterday, on pace with earlier announcements.  Big tech announcements wrapped up with Amazon after the close and the results showed significant earnings growth amongst them. Speaking of earnings growth in broader view, nearly half of the S&P500 member companies have announced earnings so far and the reports show an average annual growth of 44%, which is commendable, to say the least. Though companies are beating, not all stocks are rising as investors have very high expectations with stocks at these fully valued levels.  It was also a big day for the US economy.  The Department of Labor announced that first time jobless claims for last week were 553k, which is a pandemic low… but still quite high relative to pre-pandemic levels. As I wrote in yesterday’s note, investors will be watching the employment situation closely, hoping to get a feel for the Fed’s next move.  Also yesterday morning, the Bureau of Economic Analysis announced that Annualized Quarterly GDP Growth for Q1 was +6.4%.  A quick side note on that number. The annualized growth number assumes that we have the same results for the next 3 quarters and then applies a little voodoo math, making it a little misleading.  But in this case, economists actually expect an even larger increase in the next quarter with reopening picking up.  For a bit of context, a growth number of this magnitude is quite large and atypical even for a recovering economy… so it is worth applauding.  For additional context, the actual GDP is $22.04889 trillion, slightly higher than the pre-pandemic level of $21.5611387 trillion.  For a final data point on the number, the Euro Area GDP was released this morning, WHILE YOU SLEPT, and it showed a decline of -0.6% after falling by -0.7% in the prior quarter, confirming that the area experienced a double dip recession.  So, things are on the mend in the US, not so much in the EU.  What do investors think of this?  Surely the big surge in output is driven by spending and unprecedented fiscal and monetary stimulus, which can only lead to one thing: inflation. You can see that in the rising bond yields in yesterday’s session.  Ten-year treasury yields got as high as 1.68% yesterday, but ultimately settled up by +3 basis points to 1.63%.  Those inflation fears and higher yields caused selling pressure on growth stocks while the strong economic figures added buying strength to value stocks.  A repeat of what we witnessed earlier in the year.  Will the rotation persist?  It is too early to tell, but if you listen to the Fed, you might get some comfort in its guidance that it plans on keeping rates and yields in check… until it decides not to.

THE MARKETS

Stocks rose in yesterday’s session on solid economic reports and continuing positive earnings announcements.  The S&P500 climbed by +0.68%, the Dow Jones Industrial Average climbed by +0.71%, the Russell 2000 Index slipped by -0.38%, and the Nasdaq Composite Index traded up by +0.22%.  Bonds slipped and 10-year treasury yields added +3 basis points to 1.63%.

NXT UP

– Personal Income and Spending (1Q) may have increased by +20.2% and +4.1%, after falling by -7.1% and -1.0% respectively in the last quarter.

– PCE Core Deflator (March) is expected to reflect a year over year growth of +1.8%.

– Chicago PMI (April) is expected to come in at 65.3, down slightly from last month’s 66.3 read.

– University of Michigan Sentiment (April) is expected to be 87.5, higher than earlier estimates of 86.5.

– This morning, Aon, LyondellBasell, Clorox, L3Harris, Colgate-Palmolive, and Johnson Controls beat while Weyerhaeuser, Chevron, Charter Communications, and Pitney Bowes missed.  Before the bell, we expect results from AbbVie, Goodyear Tire & Rubber, Exxon Mobile, and Illinois Tool Works. After the bell, way after the bell, like tomorrow, we will hear from Berkshire Hathaway.

– Next week, earnings will continue en force in addition to manufacturing/services PMIs, Factory Orders, Durable Goods Orders, and the monthly employment report from BLS. Check back on Monday for details and calendars.