Last week saw the peak of earnings season, a plethora of economic data releases, a speech by the President to a joint session of Congress with more spending plans… all leading to a second consecutive flat week for the market. So what are we hearing from executives this earnings season, what is the economic data telling us, and what is the outlook for the President’s policy proposals that have the market lulled into a standstill? It’s all outlined in this week’s weekly market summary. 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 Summary
The overall market sentiment throughout 2021 continues to be driven by three competing themes:
- 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 data points last week on all three of these, and the net effect was a flat market.
Earnings Season Continues to Support Economic Recovery Hopes
Last week, earnings season continued. To sum up just how well it’s going – today’s WSJ headline reads: “Record Share of Companies Are Beating Earnings Estimates.” According to their source, 87% of companies that have reported so far reported earnings better than expected vs. the 65% average going back to 1994. That is the highest share of companies reporting positive earnings surprises EVER. Companies are not only beating earnings estimates. They are crushing them. Dating back nearly 20 years, companies have beat earnings estimates by an average of 3.6% – so far this year, earnings have averaged nearly 23% above expectations, posting their fastest rate of earnings growth since 2010.
You can see this in the list below of a selection of the companies that reported just last week alone.
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? Another 1,500 companies are scheduled to report earnings. Some of the biggest names to watch:
- Monday – Affiliated Managers Group, Apollo
- Tuesday – Under Armour, ConocoPhillips, CVS, Hyatt, Lyft, Pfizer, Western Union, Zillow
- Wednesday – General Motors, Etsy, Hilton, Lumber Liquidators, NY Times, PayPal, Tanger Factory Outlets, Uber
- Thursday – AMC Entertainment, AIG, Anheuser-Busch, Beyond Meat, Cars.com, Dropbox, Expedia Group, Groupon, Kellogg, Moderna, Peloton, Wayfair
- Friday – DraftKings
Interest Rates Ticked Up Again
Interest rates had been moderating since the start of April, but last week, resumed their rise again. The S&P 500 closed flat for the second consecutive week but ended the month up +5.2%, and is now up +11.3% year to date. For perspective, on average, historically, the market averages about a 10% return annually.
Last week, we also saw midterm and long-term interest rates, which had been trending lower since the start of April, start to rise again. With the rise in 30 year treasuries, we also saw mortgage rates tick up for the first time all month as well, though they still remain near all-time historic lows.
As I have said for the last few weeks, interest rates softening over the last few weeks was just a temporary pause – not a trend expected to continue – given growth and inflation expectations. We are still seeing inflation expectations in the 10 Year Treasury to TIPS spread, and this month’s CPI numbers for March, as well as last week’s PCE Price Index data for March, give us hard data confirming those expectations are valid. Ten-year TIPS yields are currently 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%. This spread historically has predicted inflation growth about a quarter ahead of time, and at current levels, estimates inflation of about 2% for the coming quarter (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%.
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. 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.
You can check out the list of consumer goods companies reporting planned price increases this year in last week’s weekly update. And here’s a quote from Richard Tobin, President and CEO of Dover Corporation, a $20 billion machinery company, during his company’s Q1 earnings call last week, about how they are seeing not only raw material costs increase, but now labor costs too:
But the fact of the matter is, I get it that the Fed doesn’t want to recognize inflation. But there is inflation. And it’s not just the raw materials because raw materials are in the sub-components that we buy from our vendors who are trying to pass along the same kind of price increases that goes into our bill of materials and everything else. And clearly, at the assembly level, on labor, availability is becoming a problem. And that is beginning to start to move up labor costs over time. So, it’s now gone from – it’s the capital good sides that are buying a lot of raw materials. Now it’s moving into the assembled components portions of the business, that is going to have to accommodate that over the balance of the year.Richard Tobin, President & CEO, Dover Corporation, Q1 2021 Earnings Call
You can also see it – both how you are all experiencing inflation, and how it’s especially hitting commodity prices – in all your comments on this post in my feed last week…
As I mentioned above, after a few weeks of tech and growth rallying, last week we saw inflation concerns take hold again. Interest rates inched up, and we saw a return to the year’s earlier trends with growth and tech underperforming, as value and real estate outperformed, and the market as a whole, continues to be flat overall for the last two weeks.
As mid-to-long-term rates ticked up again last week, we saw the recovery in bond prices begin to reverse last week as well. 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 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, gave the market room to run over the first few weeks of April. However, last week, interest rates began to increase again and stopped the stock market’s progress. 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 had a bit of a selloff two weeks ago, but regained some of those losses last week, and is still up +95.6% year to date.
The Economic Weekly Market News
This week’s major economic releases included:
- Weekly data: Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet Data
- Q1 2021 GDP – First Estimate
- March Disposable Income, Personal Consumption Expenditures & PCE Price Index
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 553,000, a decrease of 13,000 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 2 weeks, 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 4/10 (this comes at a longer lag) is far greater – 16.6 million, this week down by 0.8 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.
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 4/29/2021, the average 30-year rate was 2.98% with 0.7 points. Rates remain near historic lows, but ticked up last week for the first time in a month, as long-term treasuries rose too. Mortgage rates are up +0.31% 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 0.70%. 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 following last week’s FOMC meeting, though their balance sheet released show less than that over the last month.
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!
Q1 2021 GDP – First Estimate
On Thursday, the Bureau of Economic Analysis released the first estimate of Q1 2021 GDP. We saw better than economists expected growth in Q1, with Real GDP increasing at an annual rate of +6.4% and faster than we saw in Q4 as well (+4.3%). However, we are still off from the Q4 2019 peak, so technically, still in a recession.
I gave a deep dive on GDP and its components on the podcast a few weeks back, but I thought a brief breakdown here into how the various components have behaved through the pandemic, and now as we enter the recovery, might help give some perspective into what we are seeing in the economy more broadly.
As a refresher, GDP is the measure used, not only here in the US, but by countries globally, as the measure of output for a country’s entire economy. There is a very simple formula for gross domestic product.
GDP = C + I + G + (X – M), where
- Personal consumption (C), all the stuff and services you and I spend money on every day
- Investment (I), all the money businesses invest in equipment, buildings, technology, inventories, and residential investment too
- Government spending (G), everything the federal, state, and local government spends
- Net exports (X-M), or all the goods we export less all the goods we import (and because we import more than we export, this is a negative drag on GDP for us here in the US)
Over the last 70+ years, our economy has shifted significantly from an industrial and manufacturing, goods-driven economy, to one far more driven by services. Personal Consumption Expenditures (PCE) made up 64% of total GDP in both 1947 and now in Q1 2021… but the split has shifted. In 1947, services made up ~40% of PCE… today, they are 2/3s of it.
And services are what was hit hardest during the pandemic, as lockdowns and health restrictions limited people’s ability to engage in face-to-face commerce. PCE for goods has more than recovered – and in fact, has been fully recovered since Q3 2020. But PCE for services, which was down as much as 14% from the Q4 2019 GDP peak, still falls short as of Q1 2021.
Disposable Income, Personal Consumption & PCE Price Index
That brings me to the PCE data for March, also released by the Bureau of Economic Analysis. Hopefully, given the GDP data above, you now better understand why these monthly releases are so relevant. As Personal Consumption goes, so goes the broader economy. And also, the Fed focuses on the PCE Price Index as its key indicator for inflation.
Big picture – here are a few of the things we’ve been seeing over the course of this recession:
- Disposable income has been upheld with both direct stimulus payments from the government, as well as expanded federal unemployment benefits.
- PCE, which fell sharply at the outset of the recession, has yet to recover, as people increased savings rates, despite increases in income from direct stimulus payments.
We did see personal consumption expenditures increase in March, up +4.2% vs. the month prior, but it still seems to fall short of the long-term trend line, despite a +23.6% increase in incomes for March driven by the direct stimulus checks.
Now, in addition to income and spending, this economic release also gives us the PCE price index, that measures changes in prices based on what consumers are actually buying, including any substitutions they may be making due to price increases or shortages in the economy. The Fed considers it to be a more accurate assessment of inflation than the CPI, given these impacts.
For March, the PCE Price Index was up +2.3% over the last 12-months, officially above the Fed’s long-term average target of 2%. However, core PCE Price Index, excluding more volatile food and energy components, was up just 1.8%. Energy comparisons are likely to continue to drive higher prices for the rest of 2021, and as we are hearing from so many different touch points in our economy, prices are rising for other reasons too: commodity prices more broadly, labor shortages, as well as other supply chain shortages.
The Political Update
The big political news of the last week most likely to impact your family finances was the unveiling of the White House of President Biden’s $1.8 trillion American Families Plan, the second part of his major legislative plans to deliver on many of his campaign promises. While I am going to breakdown the various components below, I want to be upfront in saying that the specifics, particularly in terms of costs, as well as changes to individual income taxes intended to pay for this plan, are not as clearly outlined here for every category by the White House as they were for the $2.3 trillion American Jobs Plan that I broke down for you all a few weeks back. In general, it is described as $1 trillion in new spending and $800 billion in tax credits for American Families.
$1.8 Trillion American Families Plan
|Expand Earned Income Tax Credit||Make temporary expansion of earned income tax credit from $1.9 trillion American Resue Plan permanent. Credit ranges from $538 to $6,660|
|Access to Paid Family and Medical Leave||$225 billion||Guarantee 12 weeks of paid parental, family, and personal illness/safe leave within 10 years, and ensure 3 days of bereavement leave each year.|
|Free PreK||Part of $200 billion education investment||Close achievement gap and increase labor participation rate for parents by providing “high-quality universal pre-kindergarten for all 3- and 4-year-olds”|
|Tuition Free Community College||$109 billion||First-time students and workers wanted to reskill can enroll in community college to earn a degree or credential for free. Also calls on Congress to fund $39 billion for 2 years of subsidized tuition for 4-year HBCU, TCU, or MSI students in families earning less than $125,000 and $5 billion to expand existing aid grants to those schools|
|Increase Pell Grant Awards||Double the maximum Pell Grant award to $1,400. White House says the value of these grants has fallen from covering nearly 80% of school costs to under 30%|
|Create a College Retention and Completion Program||$62 billion||Only 3 out of 5 students finish any type of degree program within 6 years. This grant program would serve low income students in community colleges to “invest in completion and retention activities” including services that range from child care and mental health services to faculty and peer mentoring, and emergency basic needs grants|
|Education and Preparation Programs for Teachers||$9 billion||Double scholarships for future teachers to $8,000/year, as well as year-long, paid teacher residency programs. Targets $400 million for teachers at HBCUs, TCUs, and MSIs, and $900 million for special ed teacher development. $1.6 billion to help over 100,000 teachers earn credentials for special ed, bilingual ed, and certifications to improve teacher performance. $2 billion for educator leadership programs that support new teacher mentorship and diversity|
|Expand Nutrition Programs for Children||$45 billion||Overall health and nutrition programs to reduce food insecurity among children, including $25 billion to make Summer EBT program permanent to children receiving free and reduced-price meals, $17 billion to expand free meals in high poverty districts, and $1 billion to support schools expanding heathy food offerings|
|Expand Child Care & Make Child Tax Credit Permanently Refundable||$225 billion||Fully cover child care costs for most children in “hard-pressed working families.” Families earning 1.5x their state median income will pay max of 7% of their income. Raise minimum wage for child care workers from $12.24 in 2020 to $15/hour. Make the expanded child tax credit in the American Rescue Plan permanent.|
|Extend Affordable Care Act Premiums Tax Credits||$200 billion||Make permanent the lower premiums provided by the American Rescue Plan. White House says it will help 9 million people save hundreds of dollars per year on premiums and 4 million uninsured will gain coverage|
Like the American Jobs Plan, the American Families Plan intends to spend these funds over the next 10 years, while raising taxes to pay for it over 15 years… resulting in increased deficit spending in the interim. While the American Jobs Plan targetted increases in corporate taxes to fund it, the American Families Plan is targetting increases in individual income taxes, while President Biden continues to hold strictly to his promise that no household earnings more than $400,000 will see their taxes increase.
Here is a breakdown for some of the individual income tax changes being proposed to fund the American Families Plan, which is a combination of raising taxes on the wealthiest Americans, in combination with greater enforcement of existing tax laws.
How To Pay for It: Individual Income Tax Increases
|Raise Top Individual Rate to 39.6%||This will increase the top individual federal income tax bracket from 37% to 39.6% for incomes over $400,000|
|Raise Capital Gains Taxes||For those with income over $1 million a year, capital gains tax rate will be increased to ordinary income rate of 39.6%, nearly double the current 20% rate. He also wants to close the stepped-up basis loophole that allows heirs to reduce capital gains taxes. The IRS also charges high-income investors an additional 3.8% net investment income tax created under the Affordable Care Act, making the proposed all-in capital gains rate 43.4%. The White House claims this would apply to just the top 0.3%|
|Eliminate Medicare Tax Loopholes||White House says high-income workers and investors generally pay 3.8% Medicare tax on earnings, but loopholes allow them to avoid them.|
|Invest in IRS Enforcement||IRS Commissioner claims US is losing $1 trillion in unpaid taxes annually due to resource limitations and lack of enforcement. White House says top 1% of individual taxpayers failed to report 20% of income and did not pay $175 billion in owed taxes.|
In total, President Biden has now proposed more than $6 trillion in additional government spending since the start of his Administration, little more than 100 days ago.
- $1.9 trillion American Rescue Plan, the “coronavirus relief” bill passed by a strict party-line majority in March
- $2.3 trillion American Jobs Plan
- $1.8 trillion American Families Plan
For perspective, in FY2020, the US government, including stimulus spending during the pandemic, spent $6.6 trillion, while collecting just $3.4 trillion in federal revenue. In FY2019, pre-pandemic, the federal governement spent $4.4 trillion vs. revenues of $3.5 trillion. If his 2 plans pass Congress as outlined, we are talking about a roughly 10% annual increase in the federal budget… one that already runs at nearly a $1 trillion annual deficit. This is the biggest proposed increase in government spending since Roosevelt’s New Deal, which was necessary to move us out of the Great Depression… yet, we seem to already be recovering from our current recession already.
In his speech on Wednesday night, President Biden said:
When you hear someone say that they don’t want to raise taxes on the wealthiest 1 percent or corporate America, ask them: “Whose taxes you want to raise instead? Whose are you going to cut?”President Joe Biden, Address to Joint Session of Congress, April 28, 2021
I would pose to you a few different questions. Is a 10% increased in federal spending annually necessary? Are there not funds already that should not be better purposed and re-allocated? Why is the answer always spend more? Do you want a larger, more powerful government and a society even more deeply dependent on it?
The Virus Update
Concerns over a potential 4th wave here in the US are near gone as vaccinations among younger age groups increase, and we are new cases and deaths definitely fall again. New cases for the last week were down -15% vs. the week prior (second consecutive week of double-digit decline), and deaths were down as well, both trends in the right direction. Meanwhile, 56% of Americans over 18 have now received at least one dose of the vaccine, and 40% over 18 are fully vaccinated.
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 near 8% increase both in vaccines distributed and vaccines administered last week (down from double-digit growth the weeks prior), but are now vaccinating just 2.5 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 103 million people are now fully vaccinated, representing 31% 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.
The Week Ahead
It’s another big week for economic data, as well as the peak of earnings season. Over 1,500 companies are scheduled to report Q1 2021 earnings this week (5/3-5/7). On the economic front, we also have the monthly Employment Report in addition to the usual weekly data.
- Thursday – Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet data
- Friday – April Employment Report
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!