Earnings season just about wrapped up last week… but the biggest market impact of the week came from the CPI report. Despite everyone predicting it was coming, now that we actually see inflation in the reported data, the market didn’t like it too much. We also saw flat retail sales number for April too. To see it all broken down, and the impact this week in the market, read on… 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
News on the political front continues to be relatively quiet, as Congress continues to debate Biden’s proposals mostly behind closed doors. But last week, a strong finish to earnings season was more than tempered by the April CPI report (which showed prices up +4.2% over the last year) and April Retail Sales report (which showed absent stimulus checks, retail sales held flat).
Earnings Season Continues to Support Economic Recovery Hopes
Last week, earnings season just about wrapped up. Through the end of last week, with 91% 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 50.3% 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.
You can see this in the list below of a selection of the companies that reported just last week alone. Companies missing earnings were largely concentrated in the travel, leisure, entertainment and retail sectors.
So if the market trades on earnings expectations, and companies are beating those expectations so solidly, why isn’t the market up more? Investors may be wary that all this good news was already baked into the market, given current sky-high valuations. Also, last week, any positive earnings news was more than offset by the broader economic implications of higher inflation.
Interest Rates Rose Last Week & Stocks Sold Off
Interest rates neared their year-to-date highs last seen in early April mid-week last week, following the release of the higher than expected April CPI report. This led to a broad stock market sell-off. Interest rates subsided a bit as the week progressed and the market ended the day up on Friday, but not enough to recover the sell-off earlier in the week.
The S&P 500 ended the week down -1.4% but remains up +11.1% year-to-date. For perspective, on average, historically, the market averages about a 10% return annually.
The higher than expected CPI numbers for April, a key inflation indicator, drove interest rates up mid-week. Rates finished the week just 0.1% shy of their 2021 highs (10-year Treasury rate high was 1.75% on 3/31; 30-year Treasury rate high was 2.48% on 3/18). As I have said for the last few weeks, interest rates softening earlier this month is just a temporary pause – not a trend I expect to continue – especially given economic recovery, growth and inflation expectations… which we are now not only expecting, but actually seeing in the reported economic data.
The 10 Year Treasury to TIPS spread, another solid indicator of inflation expectations, hit a year-to-date high last week too. Ten-year TIPS yields remain 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 2.52%, it’s highest level since 2013. 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 continuation of the market trends we have seen all year: investors’ concerns for inflation are leading them to seek yield over growth. This drives outperformance of asset classes like real estate and inflation beneficiaries, like commodities, over growth stocks, which tend to underperform in the face of rising interest rates given their high valuation ratios.
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 sinificantly outperform Growth and Tech over 2021, and last week.
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.
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 last week, takes some headwind pressure off the stock market. That sentiment changed this week, with the CPI report revealing solid year-over-year prices increases. 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 moderated a bit in recent weeks, as competing cryptocurrencies, like Dogecoin and Ethereum have gained investor interest.
Bitcoin sold off further last week following the announcement by Tesla that they have “suspended vehicle purchases using Bitcoin” over environmental concerns. If this leaves you scratching your head – let me add some explanation. First, part of the investment thesis behind cryptocurrencies, in general, is the widespread adoption and use of crypto for transactions. The rise in Bitcoin since early February was in part, fueled by Tesla’s (and others) announcements of the acceptance of Bitcoin as a means of payment. Tesla now saying they are suspending this, now has the opposite impact.
How is crypto a drain on the environment? Due to the energy required for mining it. It requires significant computing power to mine cryptocurrency – and the more secure it is, the more computing power is required, and the greater the energy demands. You can learn more about Bitcoin, the investment thesis behind cryptocurrency and all about mining it here.
The Economic Weekly Market News
This week’s major economic releases included:
- Weekly data: Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet Data
- April Consumer Price Index
- April Advanced Retail Sales
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 5/8 dropped to 473,000, a decrease of 34,000 from the previous week’s upwardly revised level. This is a good sign, but still far from normal. Including Pandemic Unemployment Assistance (expanded Federal program), initial claims were over 576,000, 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, is holding at 3.7 million people, an insured unemployment rate of 2.6%, where it’s been for the last several weeks. 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 4/24 (this comes at a longer lag) is far greater – 16.9 million, this week up by 0.7 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, total insured unemployment 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.
For more on the labor market in the current environment, check out What’s Up with the Labor Market here.
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 5/13/2021, the average 30-year rate was 2.94% with 0.7 points. Rates remain near historic lows, but have mostly trended up in 2021. Mortgage rates are up +0.27% 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 0.66%. 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, and even decline in the MBS market. However, the Fed reaffirmed its commitment to $120 billion in monthly purchases ($80 billion in Treasuries, $40 billion in MBS) following last week’s FOMC meeting, though their balance sheet release shows less than that over the last month. And over the last month, their MBS holdings have actually declined.
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.
Calling All Realtors & Mortgage Experts…
I will be hosting a second LIVE Q&A this Spring and would love for you to share your expertise and what you are seeing in your local markets as the Spring selling season gets underway.
FRIDAY, 5/21 – 9:30AM ET
If you are able to join, please sign up here!
Consumer Price Index (CPI) for April
We have been tracking closing tracking indices for inflation as concerns about higher inflation have increased. The Consumer Price Index (CPI) for April was released last week, and, for the second month in a row undoubtedly shows the inflation we have all been anticipating, and more than that, it was more than most experts expected as well. The release on Wednesday drove a widespread sell-off in the stock market.
Over the last 12 months, weak energy comparisons have served to offset increasing prices in other sectors like Food. But from here forward, as long as energy prices remain where they are or increase, they will continue to serve as a tailwind, driving inflation. It’s important to realize also that energy prices impact far more than just your utlity bills or the gas you put in your car. They add to the cost of almost all consumer goods due to rising transportation prices, as an example.
The Fed now uses the PCE Price Index for their official measure of inflation. Its April values will be out at the end of May. The Fed has said it targets 2% long-run average inflation – and given it has run below 2% over the last year, they will allow it to run above 2% for a period of time before raising interest rates, particularly given other objectives, like full employment.
Prices are rising across almost every single sector, though energy prices are clearly driving the biggest increase in the CPI overall. But ex food and energy, sometimes referred to as core CPI, is still up +3.0% over the last year.
The Fed continues to hold firm on accomodative monetary policy, believing the inflation we are seeing to be transitory – meaning temporary, and largely due to short-term supply chain issues as well as weak 2020 comparions. It should be noted, however, that even if prices do nothing but just stay where they are currently, we will see year over year CPI growth at or above 2% for the entire rest of 2021. And if prices continue to rise, they will be even higher than that.
Advanced Retail Sales for April
The US Census Bureau releases an estimate of US retail and food services sales each month. Why do these matter? They give us the first indication each month of how consumer spending is doing, and recall that consumer spending represents 70% of our overall economy.
March comparisons were steep, boosted by the third round of stimulus checks that went out that month. April retail sales were flat vs. March. If you zoom in at the most recent data, you can see how stimulus checks boosted January spending above the long-term trendline, February was just coming back towards reality, and another round of stimulus in March boosted sales again. The fact that they held steady in April some are viewing as the economy standing on its own – though we also know that savings rates were extremely elevated in March (as well as over much of the last year). But nevertheless, it is a good sign…
While retail sales were flat overall, retail sales, excluding restaurants, were down -0.3% vs. March, while Auto and Restaurants were up 2.9% and 3.0%, respectively, as vaccination rates continue to increase and health restrictions subside. On a year-over-year comparison, growth levels are extreme – remember, this is comparing April 2021 vs. a full month of total lockdown in April 2020. The only thing that looks relatively normal is grocery sales – which makes sense given that’s really the only place people were still spending money last year.
Remember, the US issued more than 90 million checks worth a total of $242 billion in March. That in combination with accelerating vaccination rates, and many states easing back health restrictions, is driving a healthy recovery in retail spending. Let’s see how the trend continues into 2021, absent further stimulus.
The Virus Update
New cases are now down 55% from just a month ago. New cases for the last week were down -21.4% vs. the week prior (a month straight of double-digit declines), while deaths are also down double-digits 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 last week’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. This announcement last week subsequently led to many private businesses, including Target, Walmart, Trader Joe’s, Starbucks and Costco, to drop 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. Last week, availability was expanded to those ages 12-15, with the FDA giving EUA to the Pfizer vaccine for this age group. 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. Note that vaccination data continues to be updated for up to a week, so expect the most recent week’s data to increase.
So far, over 123 million people are now fully vaccinated, representing 37% 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.
The Week Ahead
On the economic front, we will get insights on the housing market this week.
- Thursday – Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet data
- Friday – April Existing Home Sales
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!