The market was a bit mixed last week. Inflation and rising interest rates continued to pressure the market early in the week, while improving jobless claims numbers led to some market recovery on Thursday. We also got the Fed’s minutes from their April meeting, some insights into negotiations on the American Jobs Plan, aka Biden’s infrastructure plan, and Bitcoin continued to tumble. For more, you can find all the previous Monday Market Update’s here. You can now also get the market weekly update every week on Finance Explained, my new podcast, along with a deep dive on a topic relevant to the week’s headlines.
Monday’s Weekly Market Review
The three competing market themes for 2021 continue to be…
- Hopes of a strong and robust economic recovery
- Tempered by rising interest rates fueled by inflation concerns
- And threatened by unfavorable changes to corporate and capital gains taxes
We got news to support ALL three of these themes last week, with the end result being the S&P 500 down -0.4%, as interest rates ticked down just slightly.
Record Q1 Earnings Season 95% Complete
Last week, earnings season just about wrapped up. Through the end of last week, with 95% of S&P 500 companies having reported Q1 2021 earnings results, 86% of companies reported a positive EPS surprise – meaning they beat the earnings estimates of research analysts. So far, companies are reporting Q1 earnings nearly 51.9% higher than Q1 2020, the highest growth rate since Q1 2010. The 86% surprise percentage is the highest surprise rate since Factset began tracking data in 2008.
Related Post: What Drives the Stock Market?
So if the market trades on earnings expectations, and companies are beating those expectations so solidly, why isn’t the market up more? Earnings guidance has been mixed – with 33 S&P 500 issuing negative EPS guidance, and 54 S&P 500 companies giving positive guidance. Valuation ratios also remain extremely elevated, at 21.2x Forward Earnings estimates (vs. 18.0x 5-year average and 16.0x 10-year average). Investors are wary that all this economic recovery was already baked into the market, given current sky-high valuations, that leave no margin for error. Also, any positive earnings news is being somewhat offset by the broader economic implications of higher inflation, which could pressure corporate earnings, as input costs increase, as the year moves forward.
The Ups and Downs of Last Week’s Market
Interest rates neared their year-to-date highs two weeks ago, following the release of the higher than expected April CPI report. This interest rate pressures and inflation concerns continued during the first half of last week, and were only exacerbated on Wednesday when the Fed released the full minutes from the April FOMC meeting. For the first time, there was clearly concerns that the inflation we are currently seeing may not just be transitory:
A number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year. They noted that in some industries, supply chain disruptions appeared to be more persistent than originally anticipated and reportedly had led to higher input costs.Minutes of the Federal Open Market Committee, April 27-28, 2021; Released May 19, 2021
The S&P 500 ended the week down -0.4% but remains up +10.6% year-to-date. For perspective, on average, historically, the market averages about a 10% return annually.
Interest rates subsided slightly from the week prior, following the higher than than anticipated April CPI numbers, but spiked on Wednesday following the release of the Fed’s FOMC minutes, which led many to believe the Fed may begin to taper off asset purchases and raise rates sooner than previously anticipated. We will get the detailed breakdown of their estimates following their next meeting in mid-June.
The 10 Year Treasury to TIPS spread, another solid indicator of inflation expectations, which hit a year-to-date high two weeks ago, subsided slightly, but still remains elevated. Ten-year TIPS yields are negative, meaning current actual long-term interest rates are lower than expected inflation. The Treasury spread to TIPS continues to rise, ending last week at 2.41%, its highest level since 2013, and up more than 20% in 2021, and doubled from a year ago. This spread historically has predicted inflation growth about a quarter ahead of time (vs. latest level for April of 4.2%). It should be noted the Fed’s own estimates for 2021 inflation now sit at 2.4%. The TIPS spread is now at its highest level since 2013, when the Fed also held the Fed Funds rate near 0%. The Fed did not begin raising rates until the end of 2015.
Last Week in the Markets
Last week, we saw a bit of reversal of the market trends we have seen all year: investors’ concerns for inflation have been leading them to seek yield over growth. Last week, we saw outperformance of growth stocks… but still saw some inflation trades too, as real estate and finally, gold, outperformed.
Inflation and rising interest rate concerns continue to drive most of the stock market performance this year, as we continued to see Value, Real Estate and Small Cap names significantly outperform Growth and Tech over 2021. However, you can see how over the last 6 weeks or so, everything has been in a bit of a flat holding pattern.
As mid-to-long-term rates spiked mid-week then softened a bit, we saw the opposite impact on bond prices. For more on the inverse relationship between bond yields and bond prices, see 10+ Different Types of Investments under How Bonds Work. But you can see that same roughly 6-week holding pattern in the bond market as well – ups and downs, but we are pretty much where we started April at now.
Mid and long-term bond yields peaked at the start of April, before starting to soften over the last several weeks. Just that little bit of softening, mostly due to investors’ beliefs that the Fed will hold off on raising rates for now, which the Fed reaffirmed following its regularly scheduled FOMC meeting in April, takes some headwind pressure off the stock market. That sentiment changed over the first half of May, with the April CPI report revealing solid year-over-year price increases and now last week, the Fed’s own FOMC minutes revealing some on the Committee are concerned these price increases could be more than just temporary. To better understand the relationship between interest rates and the stock market, check out What Drives the Stock Market?
The rise in the longer-term end of the current yield curve since the start of the year has driven the price of bonds down significantly year-to-date. The more steeply upward sloping yield curve is representative of a more normal, growing economic environment, but also a result of inflation expectations and expectations of more government borrowing in the short-term. Compare it to the yield curve last March, an inverted curve, when long-term Treasury rates hitting their lowest levels ever, which is predictive of a recessionary environment.
Concerns over inflation, and the rapid growth in the money supply, have also fueled the rise in more speculative investments, impacting not only commodities but also cryptocurrencies, like Bitcoin. Bitcoin’s performance has stumbled dramatically in recent weeks, first as competing cryptocurrencies, like Dogecoin and Ethereum have gained investor interest, and second, as increasing concerns over regulatory pressures have ramped up.
Related Post: 10 Things to Know About Bitcoin Before You Buy It
Last week, Bitcoin continued its sell-off, down -25% for the week, and now down more than -40% from its mid-April all-time high. Over the last few weeks, the sell-off was accelerated by two major headlines:
- WSJ: The IRS is Coming for Crypto Investors Who Haven’t Paid Their Taxes
- China’s Vow to Crackdown on Crypto Mining, Trading Activities
Is it just a coincidence that the Bitcoin sell off started right around US tax season deadlines (typically April 15th, but extended this year to May 17th)? A primary function of a brokerage account is to track trading activity for tax purposes and report it to the IRS. The rules around reporting for crypto exchanges to date have been limited – but governments around the world are actively changing that.
The sell-off in Bitcoin, aka “new gold”, may be what finally sparked the rally in actual gold last week – which was up 1.9% last week.
The Economic Weekly Market News
This week’s major economic releases included:
- April Existing-Home Sales
- Weekly data: Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet Data
April Existing Home Sales
Last month, I gave a detailed update on the housing market and the forces driving the current demand and price increases in the housing market here, as well as in a podcast deep dive.
Related Post: Is this a Good Time to Buy a House?
The data released last week by the National Association of Realtors confirmed much of what we were already expecting – lower inventories faced with high demand driving further price increases, and limiting actual sales due to lack of inventory.
Last Friday, I also hosted two realtors for Live Q&A to talk about what they are seeing in this unusual market. They talked about factors that hadn’t even occured to me – from investors coming into urban markets to scoop up the deals left behind by families who fled to the suburbs, to buying tax liens.
They also confirmed what I shared with you before – and the latest lending stats from the Fed Consumer Credit survey confirms it as well. This isn’t 2008. Lending standards are tighter than ever, with 86% or mortgages going to those with a credit score of 720 or higher, and 3 out of 4 going to those with scores over 760. The reality is with mortgage rates holding at record lows (and rates predicted to soon go higher), combined with home price appreciation (many of which the bank appraisal falls short of the sale price), banks can’t afford to give mortgages to higher credit risk borrowers… so they aren’t. Pre-2008 Housing Crisis, mortgages issued to borrowers with credit scores below 720, represented 2-3x as much as the mortgage originations (35-45%) as they do currently (14%).
Weekly Jobless Claims
While the monthly employment report gives us far more insights into demographics and industry breakdowns of the labor market, Weekly Jobless Claims gives us more real-time data on the labor market’s progress. On Thursday, weekly jobless claims for the week ending 5/15 dropped to 444,000, a decrease of 34,000 from the previous week’s upwardly revised level, and the lowest level yet since the start of the pandemic. This is a good sign, but still far from normal. Including Pandemic Unemployment Assistance (expanded Federal program), initial claims were over 539,000, still more than double the weekly initial claims pre-pandemic. For perspective, including new claims under the expanded federal Pandemic Unemployment Assistance program, we have only just seen new initial claims come under the highest level ever previously reported before the pandemic for just the last month, after seeing them well above it for an entire year.
Total insured unemployment, under regular state programs, actually increased slightly, to 3.8 million people, an insured unemployment rate of 2.7% (+0.1%). However, this remains only a fraction of those covered under the expanded pandemic and emergency programs at both the state and federal level.
Total insured unemployment under ALL programs for the week ending 5/1 (this comes at a longer lag) is far greater – 16.0 million, this week down 0.9 million continued claims vs. the week prior. This total has bounced around a lot in recent weeks but does seem to hopefully be trending downward over the last month.
As people’s state unemployment benefits expire (they use up the maximum weeks available), they may become eligible for Pandemic Emergency Unemployment Compensation, shifting from state programs to the new federal one. Additionally, also not captured in headline numbers, eligibility was expanded by the federal Pandemic Unemployment Assistance program, which makes unemployment benefits available to many who may not have received benefits under regular state programs before, which also adds to the overall total.
As a result, the headline state program numbers represent less than a quarter of the total unemployment benefit recipients. Big picture: this is really what total insured unemployment looks like. Even with the solid drop in continued claims since the end of March, the total insured unemployment rate is still solidly in double digits.
Explanation of Various Unemployment Insurance Programs
It’s been a while since I broke this down and had some follower questions about it last week, so I wanted to explain some of the categories you see in the table above and chart below, specifically to two programs that are newly created due to the pandemic and supported by federal funding.
- Pandemic Unemployment Assistance (PUA)
- Eligibiilty is for those who do not qualify for regular unemployment compensation, including those who are self-employed, seeking part-time employment, or unable or unavailable to work due to health or economic consequences of the pandemic
- As of March 14, 2021, PUA was extended from 50 weeks of eligibility to 74 weeks and ends the week of September 4, 2021
- Pandemic Emergency Unemployment Compensation (PEUC)
- You are eligible for PEUC if you have exhausted your regular state or federal unemployment benefits
- As of March 14, 2021, PEUC was extended to 49 weeks of PEUC benefits until the program ends on September 6, 2021
Both of these programs did not exist before the pandemic. They are federally funded and are designed to address and fulfill shortfalls of normal unemployment benefits – like for those who are self-employed or part-time, as well as providing extended benefits for a longer period of time due to the impact of the pandemic.
In addition to both of these extended, Federal programs, the Federal government is also funding an extra $300/week unemployment benefit for all those receiving regular state benefits, as well, also through September 6, 2021.
The biggest news on this front, however, is announcements by 23 Republican-led states, following the very weak April Employment Report, that they will be terminating Federal unemployment insurance benefits early. This applies to the extra $300/week, as well as anyone receiving any benefits via PEUC, and in some cases PUA as well. If this could impact you, be sure to check the Labor Department resources in your state to understand these changes.
Why are states doing this? Check out What’s Up with the Labor Market here, where I talk about the factors impacting the current labor market.
Related Post: What’s Up with the Labor Market?
Weekly Mortgage Rates
Let’s chat about mortgage rates… with the housing market on fire, lower mortgage rates continue to support increased demand and make higher-priced homes more affordable. Freddie Mac publishes the results from its Primary Mortgage Market Survey every Thursday, giving the weekly US average for 30 Year Mortgage rates. As of 5/20/2021, the average 30-year rate was 3.00% with 0.6 points. Rates remain near historic lows, but have mostly trended up in 2021. Mortgage rates are up +0.33% since the start of the year.
I talk a lot about what’s happening with interest rates – and I’ve included the 30-year Treasury yield on these mortgage charts to help you see how overall market rates truly impact what we pay in interest as well. The 30-year treasury rate is 99.5% correlated with mortgage rates – meaning, as Treasury rates go, mortgage rates do too, almost always. And historically, the spread, or the difference in rate between 30-year treasuries and mortgage rates, has been fairly consistent as well. But note in the second chart, how much the spread has narrowed since the start of the year.
Since the late 1970s, the average spread has been 1.38%… it’s currently only 0.65%. Why? Because the Fed has stepped in as a major buyer of Mortgage-Backed Securities (MBS), holding mortgage rates lower than they might otherwise be. However, recent weeks show their open market purchase activity may be starting to slow. But, the Fed reaffirmed its commitment to $120 billion in monthly purchases ($80 billion in Treasuries, $40 billion in MBS) following last month’s FOMC meeting, though their balance sheet release shows less than that over the last month, and general downward trend, or slowing, over the last 2.5 months.
Lower rates should be a good thing for buyers… but it has an unintended consequence too. The Fed can use open market activities, acting as a large buyer in the market, to lower interest rates, but it can’t force banks to lend at those lower market rates. So while lower rates are making more expensive homes more affordable to buyers, and increasing demand for mortgages, it’s also causing banks to tighten their lending standards. With interest rates very low, banks are less willing to lend to higher risk borrowers, so they limit their exposure by tightening lending standards, limiting mortgage availability to only the most creditworthy of borrowers…. this encourages the Fed to buy more MBS to loosen the credit market, and the cycle repeats itself.
The Political Update
On the political front, two big items last week made headlines with the potential to impact your family finances.
Advance Child Tax Credit Payments
Last week, the IRS announced that the advanced monthly payments of the expanded child tax credit, expanded as part of the American Rescue Plan passed into law in March, will officially begin July 15th. There is lots of confusion, questions, and concerns about how this will impact your family’s personal income tax filings. Here’s the basics of what you need to know:
- Original Child Tax Credit of $2,000 for married joint filers up to $400,000 income limit still remains
- Expanded Child Tax Credit just for 2021 is
- +$1,000 for children ages 6-17, for total of $3,000
- +$1,600 for children under 6, for total of $3,600
- Age is based on your child’s age as of 12/31/2021
- The income limit:$150,000 for married joint filers
- $112,500 for heads of household
- $75,000 for all other taxpayers
- Phases out by $50 for every $1,000 of income you are over the limit
- Advanced monthly payments are based on the total amount, divided into 12 monthly installments – so $250 or $300/month depending on the age of your child
What to watch out for?
All payroll employees complete a W4 form, where you can claim your children and the original $2,000 child tax credit per child. This REDUCES the tax withholdings your employer takes out of each paycheck, increasing your take home pay, and effectively giving you your $2,000 child tax credit over the course of the year. If you then take the Advanced Monthly Payments you could end up in a scenario where you have taken more than the total credit, and, all else being equal (because remember – LOTS of factors impact your taxes), end up owing money when you file your 2021 taxes in April 2022.
The IRS is supposed to be setting up a portal (it’s not up yet) for families to elect to receive or opt out of advanced payments. Bookmark this link >>>> IRS Advance Montly Child Tax Credit Payments <<<< and check back as the IRS gives more updates. If you are worried about how this could impact your family, I highly recommend consulting with a CPA about your specific tax situation now, before you make this election. For more questions, check out the Child Tax Credit highlight here on Instagram where I tried to answer as many of these as I could.
Negotiations on American Jobs Plan
Last week, after little movement on the two major plans put forth by the White House – the $2.3 trillion American Jobs Plan (aka the infrastructure plan) and $1.9 trillion American Families Plan (the one with Universal PreK) – we got some update.
Afer a White House meeting with Congressional leadership of both parties, Biden offered a counterproposal, a $1.7 trillion infrastructure plan, though still well above Republican’s $568 billion plan. Biden’s proposal only really reduced funding for broadband interent and roads, bridges and infrastructure, while it intends to shift most of the other spending, for research and development and manufacturing initiatives to other legislation. There was also no budging on plans to raise corporate taxes to pay for the program. Senate Republicans rejected the offer, indicating the spending (and tax increases) are still beyond what can pass Congress with bipartisan support.
The Virus Update
New cases are now down 65% from their April peak, and are now at weekly averages not seen since the start of the pandemic. New cases for the last week were down -23% vs. the week prior (over a month straight of double-digit declines), while deaths are also down vs. the week prior, and now at levels not seen since the very start of the pandemic.
These numbers, as well as rising vaccination rates, are likely the driver behind this month’s announcement by the CDC, that if you are fully vaccinated, it is no longer necessary to wear a mask or socially distance, except where still required by law or by private businesses. Many private businesses, including Target, Walmart, Trader Joe’s, Starbucks and Costco, have now dropped their mask requirements for vaccinated customers as well.
We also saw vaccinations continue to slow down last week. Vaccines are now officially available to all US residents in every state over the age of 12, we may be starting to hit up against the population who is more hesitant to be vaccinated. We will need to watch how vaccinations progress over the coming weeks to see how quickly we can reach herd immunity levels, or if we are able to ever fully get there, given members of the population who are hesitant or refuse the vaccine.
We are now vaccinating less than 2.0 million people daily, down from over 3 million earlier in April. Vaccination data continues to be updated for up to a week, so expect the most recent week’s data to increase. So far, over 130 million people are now fully vaccinated, representing 39% of the population. Many experts believe we need to get to 65-80% vaccinated to achieve herd immunity, which would allow life to resume with some level of normalcy. Among those 18 and older, nearly 47% are fully vaccinated. Note, however, that vaccination rates continue to vary significantly by state, with the Northeast having the highest levels of vaccination rates, while the South lags.
The Week Ahead
Lots of BIG economic news to come this week:
- Tuesday – Consumer Confidence Index, New Home Sales
- Thursday – 2nd Q1 2021 GDP estimate, Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet data
- Friday – Personal Disposable Income, Expenditures and PCE Index
For More Information…
For a more detailed history of all the metrics shared, check out When Will the Economy Recover, which I previously updated monthly through 2020, and gives a more detailed overview of market and economic indicators, as well as their historical context. Questions? Feel free to leave them in the comments below, in the weekly question box in my Instagram stories, or now you can leave me voice messages for the Finance Explained podcast too!