Weekly Market Review 5-10-2021

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Earnings season continued last week… but the two biggest market impacts of the week came from unexpected sources. First, a big negative surprise from the April Employment numbers drove markets…up? And crypto fans eagerly awaited Elon Musk’s host appearance on SNL and were likely not happy with what he had to say. It’s all outlined in this week’s weekly market review. 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.

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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

Last week, news on the political front was relatively quiet. But earnings season continued to show lots of reason for optimism. However, the April Employment Report dramatically underperformed expectations on Friday… so why did this spur the market on to new heights? More on that below.

Earnings Season Continues to Support Economic Recovery Hopes

Last week, earnings season continued. Through the end of last week, with 88% of S&P 500 companies having reported Q1 2021 earnings results, 86% of companies reported a positive EPS suprise – meaning they beat the earnings estimates of research analysts. So far, companies are reporting Q1 earnings nearly 50% higher than Q1 2020, the highest growth rate since Q1 2010. If the 86% surprise percentage holds, it will mark 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.

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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 weary that all this good news was already baked into the market, given current sky high valuations.

Coming up this week? This is the last week of heavy volume of earnings reports. Some to watch include…

• Monday – Choice Hotels, Marriott, Party City, Rackspace, Roblox, Simon Property Group, Tyson Foods
• Tuesday – Electronic Arts, International Game Technology,
• Wednesday – Bumble, Poshmark, ThredUp, Wendy’s, Toyota
• Thursday – Alibaba Group, Disney, Airbnb, Coinbase, DoorDash
• Friday – Honda

Interest Rates Fell Last Week

After ticking up the week prior and through most of last week, interest rates, especially 3-5 year rates, dropped Friday, as a weak April employment report all but confirmed the Fed will continue to keep interest rates low. Many investors had believed strong earnings, high hiring demand would force the Fed to raise rates sooner.

Lower interest rates also caused the stock market to rally on Friday, with the S&P 500 closing at a new all-time high, now up +12.7% for 2021. For perspective, on average, historically, the market averages about a 10% return annually.

The weaker than expected April Employment report, released Friday, drove interest rates to trade lower on Friday. As I have said for the last few weeks, interest rates softening this month is just a temporary pause – not a trend I expect to continue – given growth and inflation expectations.

We are still seeing inflation expectations in the 10 Year Treasury to TIPS spread, and last month’s CPI numbers for March, as well as last month’s PCE Price Index data for March, give us hard data confirming those expectations are valid. 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 2.43%. This spread historically has predicted inflation growth about a quarter ahead of time (vs. latest level for March of 2.6%). 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.

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Last Week in the Markets

Last week, we saw a return to much 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.

The clearest market move last week? Commmodities continue to rally, as inflation-fueled price increases continue. Almost all commodities – from ag and lumber to metals and energy, continue to hit new 52-week highs, with prices up double digits, and in the case of petroleum products, iron, copper, corn and lumber – triple digits. Commodities are now up nearly 30% YTD.

These moves in input prices have already translated to higher prices on consumer goods, with companies reporting more planned price increases in 2021 as they report Q1 2021 earnings. Companies have to raise prices when faced with higher input costs in order to preserve profit margins and earnings, and almost every major industrial, consumer goods, and manufacturing executive is talking about it during their earnings calls. This is inflation.

On Friday, following the April Employment numbers, we also saw the US Dollar sell off, which led to a increase in Gold (which hasn’t gotten its usual inflation-concern push in recent months). Why? Weaker jobs number means the US economy may not be doing as well as people expected, and the promise of accomodative monetary policy by the Fed for longer, means a weaker dollar.

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 continued to soften last week, we saw the recovery in bond prices as well. For more on the inverse relationship between bond yields and bond prices, see 10+ Different Types of Investments under How Bonds Work.

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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. 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.

Many investors piled into Dogecoin last week ahead of Elon Musk’s SNL hosting appearance over the weekend. Sadly, it doesn’t seem like they cared for what he had to say – as he referred to Dogecoin, which started as a joke in 2013, as “No more real” than the dollar and admitted, “It’s a hustle.”

One other thing to watch this week? Gasoline prices. Energy prices are one of the biggest drivers of price increases across consumer goods this year, and they are looking to go even higher after a fuel pipeline was shut down over the weekend out of an abundance of caution due to a cybersecurity attack. The pipeline is the largest carrying fuel from the Gulf Coast to the Northeast. Fuel futures jumped to their highest levels in 3 years following the news. This story is still developing, and as of now, the pipeline is still shut down.

The Economic Weekly Market News

This week’s major economic releases included:

• Weekly data: Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet Data
• April Employment Situation

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 4/24 dropped to 498,000, a decrease of 92,000 from the previous week’s upwardly revised level. This is a good sign, but we need to see these lower levels continue to drop for several weeks before I say we are truly seeing continued labor market recovery – which has mostly been stalled since November. 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 3 weeks, after seeing them well above it for an entire year.

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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 4/17 (this comes at a longer lag) is far greater – 16.2 million, this week down by 0.4 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.

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 5/6/2021, the average 30-year rate was 2.96% with 0.7 points. Rates remain near historic lows, but have mostly trended up in 2021. Mortgage rates are up +0.29% since the start of the year.

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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 0.70%. 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. 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 last week… they actually bought $0 MBS.

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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.

April Employment Sitatuation

The first Friday of the month is always Jobs Friday – when the Bureau of Labor Statistics releases its detailed Employment Situation report for the month prior. The March report was the strongest we had seen since August, and given the weekly jobless claims trends last month, many economists expected 1 million jobs to be added to payrolls in April.

But Friday’s release was more than disappointing. Total nonfarm payroll employment only rose by 266,000 jobs in April, and the official unemployment rate actually increased to 6.1%, as more people returned to the labor force. At first glance, the BLS noted gains in leisure and hospitality sectors, as well as local government education, were offset by employment declines in temporary help services and couriers and messengers.

As a reminder, the Employment Situation report is based on two monthly surveys. A household survey measures labor force status and demographics, like education level and race. The establishment survey, a survey of employers, measures actual employment and payroll numbers, as well as hours, eanrings and employment by industry. All of this data is totally separate from the weekly jobless claims data, which is reported by state labor agencies and based on actual filings for and continued claims recipients for unemployment insurance. They should all be somewhat related, but I always get questions about why the numbers vary, and this is how they are sourced and why they may be different.

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The headline unemployment rate also understates the real impact of this downturn, as it doesn’t account for the 3.5 million fewer people in the labor force today vs. pre-pandemic (February 2020). The labor force represents people employed and actively looking for work. Today, there are 3.5 million fewer people in the labor force than there were a year ago. The U-6 rate, which includes those who are both underemployed, as well as those who have stopped looking for work in the last year, remained at double-digits, 10.4% for April, still 1.7x the headline rate. The labor force, however, has started to recover over the last 3 months, with 0.8 million people returning to it, and either working or actively looking for work since January. It should be noted, that more women (2.0 million) than men (1.5 million), have left the labor force during the pandemic.

Employment levels vary significantly from the headline national numbers based on demographic factors, like educational attainment, race, age and gender. Unemployment rates are highest among younger men, Black men, single mothers, and those without a high school education. I’ve shown below the difference in some of these demographics between pre-pandemic and now, where you will see some of these disparities always exist, and are just magnified in the current economic environment.

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These disparities are now part of the “maximum employment” goal the Fed looks at when setting monetary policy. The Fed remains committed to accommodative monetary policy until the labor market achieves a broad and inclusive level of maximum employment – which given these labor market disparities, as well as the underwhelming job creation in April overall – means low-interest rates are likely here to stay for a while, as the Fed has continue to indicate, but which many investors thought would come sooner given broader recovery indicators.

It’s also important to note than there is significant variability in unemployment by industry. In some industries, like Mining, Oil & Gas, there is actually higher unemployment today than at the height of unemployment a year ago.

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As people go back to work, there are also questions about the quality of new jobs being created. One way to gauge this is by the hours and average hourly wage paid for payroll employees. Both hours and hourly wages continue to increase in recent months, as new jobs have been added, which is a sign of both quality jobs, as well as a tight labor market.

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Following Friday’s weaker-than-expected Employment Report, many business leaders are calling for cuts in the expanded federal benefits – blaming the additional $300 weekly benefits payments, as well as additional weeks, as making it more difficult for businesses to hire.

This week’s Finance Explained podcast Deep Dive digs into exactly this topic… digging into the details of unemployment and unemployment benefits, how the data varies by sector and state, and what data we have around actual job openings.

The Virus Update

Concerns over a potential 4th wave here in the US are near gone as vaccinations among younger age groups increase, and new cases continue to fall. New cases for the last week were down -20.6% vs. the week prior (third consecutive week of double-digit decline), while deaths are holding stead at lows last seen over the summer.

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We also saw vaccinations continue to slow down last week. With vaccines now officially available to all US residents in every state over the age of 16, 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.

Despite those headwinds, we saw a 7% increase in vaccines administered last week, but 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 114 million people are now fully vaccinated, representing 34% 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 44% are fully vaccinated. It is also expected that Pfizer will receive EUA for its vaccine for use among 12-15-year-olds later this week.

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The Week Ahead

Earnings season continues this week, but is slowing down and nearing its end. On the economic front, we will get the next monthly data point on inflation (CPI) and consumer spending (Retail Sales) this week.

• Wednesday – April Consumer Price Index
• Thursday – Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet data
• Friday – April Retail 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!

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