Both spring and a post-pandemic economic reopening were in the April air, and markets generally responded by climbing higher. Renewed enthusiasm for technology shares and growing optimism about the global recovery helped drive the S&P 500 past 4,000 for the first time early in the month.
For all of April, the S&P was up 5.2%, the Dow 2.7%, and the Nasdaq more than 5%. For the year, that brought the gains to 11.3%, 10.7%, and 8.3%, respectively; the best start for stocks in a new presidential term since the Great Depression, according to a story in The Wall Street Journal (April 29, 2021).
There were reasons to be hopeful. March retail sales jumped nearly 10%, well ahead of expectations of 6.1%. Personal income increased by 21.1%, the most in monthly records going back to 1946. The Institute for Supply Management (ISM) reported the fastest growth on record for the services industry, with the index hitting 63.7, up from 55.3 the month before. First quarter GDP turned in a strong performance, up 6.4%. (Source: FactSet, April 30, 2021)
On the Covid-19 front, vaccinations continued to rollout, in spite of a temporary setback for Johnson & Johnson. (Bloomberg reported in early May that enough vaccinations had been administered to cover 40% of the U.S. population.) This fueled optimism and, partly as a result, the S&P 500 had hit its 19th record for the year by the end of April’s first week.
Corporate earnings provided further support for the upward trend. At month-end, with 60% of the companies in the S&P 500 reporting, FactSet pegged the 1Q “blended earnings growth rate” for the S&P 500 at 45.8%. Eighty-six percent of reporting companies surprised to the upside. Valuations, though still high, declined on the heels of this with the forward 12-month price-to-earnings ratio falling to 22x, compared to a five-year average of 17.9 (also according to FactSet).
Analysts are expecting more good news heading into 2Q. FactSet’s aggregation of median earnings estimates for the period was marked up by 4.2%, according to the April 30 report. More typically, estimates are lowered during a quarter’s first month, according to the research firm.
With apologies to the Emmy-award winning television show, Billions, it might be time for a new name. These days, it’s all about trillions. During the month, the Biden Administration proposed more than $4 trillion in new spending, including $2.25 trillion for infrastructure and a $1.8 trillion plan focused on education child care for families. This is to be paid for with, among other things, a proposal to nearly double the capital gains tax for some investors to 39.6% and higher income taxes on the “wealthy.”
This potential fiscal stimulus, in tandem with the Fed’s low rate policies, continues to fuel inflation concerns. Home prices stayed on the front foot, with the S&P CoreLogic Case-Shiller Index rising 12.0% in February (the most recent data available) on an annualized basis. Commodities prices also climbed; the cost of lumber has lately jumped more than 190% to more than $1,000 per thousand board feet, while prices for some industrial metals like copper hit multi-year highs.
Weighing against this for the moment is the Fed’s focus on job creation and the fact that the labor market is still about eight million jobs short of the pre-pandemic high. While the March employment report was strong – 916,00 jobs created – that was tempered by a disappointing April and a subsequent downward revision to the March numbers (777,000 jobs).
Fed Chairman Powell and company have so far shrugged off the signs that inflation may be rising, characterizing the phenomena as “transient” and sticking with the pledge to keep rates low. Nonetheless, investors will be watching this closely in the coming months as one of the key determinants of future market returns.
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