Daily Global Perspectives

What is the difference between Walt Disney’s, circa 1943, Chicken Little yelling “the sky is falling” and the Chicken Little, circa 2021, yelling an equally adamant “inflation is rising”? Nothing, absolutely nothing — both are equally hysterical and comical. Some may point to April’s YoY CPI rise of 4.2% and this morning’s reported PPI YoY record high of 6.2% as proof that inflation is “not transitory.” The real anger at inflation has nothing to do with rising rates and everything to do with its impact on speculative, high P/E stocks. It crushes stocks like Tesla, which currently is sporting a price 567 times its expected earnings per share. What many investors fail to recognize is that the P/E multiple is a duration play; those who would never buy a long duration, 20-year U.S. Treasury bond are happy to buy a stock with a 567-year duration. Go figure.

One of the problems with high expectations is that they leave a lot of room for disappointment. So it was with Friday’s nonfarm payrolls report, which came in at about a quarter of the roughly 1 million job gains expected, leaving total payrolls a little more than 5% below where they were pre-pandemic. Despite the undershoot and uptick in the unemployment rate from 6.0% to 6.1%, the jobs report did entail some positive developments, as average hourly wages rose, along with the labor force participation rate. An increase in the number of people looking for work counters the notion that generous unemployment benefits are incentivizing people to not work. While it’s reasonable to assume giving people more money not to work may impact some people’s decision to find a job, those claiming unemployment insurance have declined since the beginning of March. Another factor at play is the apparent lack of skills needed to fill the available job openings, as indicated by the NFIB Small Business Job Openings Hard to Fill Survey, which reached a record high in April.

Labor productivity is a key component of continued economic growth, so it was good to see that it increased by 5.4% in 1Q21 after a 3.8% decline in 4Q20. We are now in the sweet spot of first-quarter corporate earnings season; S&P 500 EPS growth has gapped up to 51.7% with 80% reported, driven by a stunning rebound in the consumer discretionary sector, where earnings have increased more than 188%. Consumers were expected to increase earnings by 100% in the first quarter, but instead we are seeing nearly twice that, a 188% increase to be exact. Since nearly 70% of the economy consists of consumer spending, in our view, consumers are the game changers and cause for continued optimism.

We wish a happy Mother’s Day to all of you moms — and I remind all of you dads that there is still plenty of time to shop!

Equity markets have had quite a run in the past year, with the S&P 500 up 89% and the Russell 2000 small cap index up 125%. This strong rally has been driven primarily by the reopening of the economy, which already may be mostly priced in. Fundamentals remain strong, Federal Reserve policy remains easy and the federal government continues to pass spending packages in the trillions of dollars; however, we see signs of things starting to cool off. The ISM Manufacturing Survey came in at 60.7, below the estimate of 65 and last month’s reading of 64.7. Although any number above 50 signals expansion, after PMI’s peak, it usually leads to little movement in markets with an average six month forward return of -1% going back to 1973. Sentiment, although not as useful for timing tops as it is for timing bottoms, is still at an elevated level. Our Voya Sentiment index is currently reading a level at the 97^th percentile going back to 2001 and the 99^th percentile going back to 2015. Even though it may sound bearish, I do not feel negative about equity markets. I do, however, believe that the chances of seeing sizeable returns like we did in the past year are slim to none.

Today's U.S. GDP release showed that the economy grew at an annualized rate of 6.4% in Q1, the fastest since Q2, 2000’s 7.5%. Today’s release was blockbuster in every measure: Consumption jumped to 10.7%; fixed investment was up 10.1%; residential spending up 10.8%; and Government consumption bounced up 6.3%. Action Economics, LLC points out that “the big Q1 GDP gain documents the updraft from vaccine distributions and two rounds of fiscal stimulus during Q1.”

The last week of April is shaping up to be an eventful one for US Markets. First, companies that comprise of 50% of the S&P 500’s market cap will announce their earnings for the first quarter of 2021, including the FAAMG mega-cap tech stocks. Since the majority of returns this year have been driven by earnings growth expectations, we expect there to be some volatility surrounding the announcements.

“A rising tide lifts all boats,” a phrase attributed to John F. Kennedy, is an apt description of the current state of the economy and markets. Risk is being rewarded and investors should take note, as I pointed out in my “March Madness Caps the First Quarter 2021” conclusion: “This may be a once in a generation boom, so we advise to capitalize on it now and worry about the unintended consequences in the future.” Incoming economic data continue to affirm my view.

Bountiful quantities of government spending combined with cheap money are driving a boom in U.S. consumption. Despite the incredibly disruptive, pandemic-induced economic shock, U.S. personal income has continued to climb throughout the recession as federal support incentivized employers to keep employees on staff and distributed additional benefits to those who did lose their jobs. More recently, the economy has stabilized and shown signs of strength while the government continues to spend and print money. Higher incomes and low interest rates have afforded consumers the ability to spend — and spend they have.

Weekly initial jobless claims for the final week of March increased to 719,000, from the prior week’s very strong 658,000. Despite the minor increase, and that claims remain well above the 2019 average of 220,000, the downward trend remains intact (Figure 1). Moreover, other indicators provide further evidence that the labor market is improving. The latest U.S. ISM Services PMI soared to an all-time high of 63.7. This follows March’s U.S. ISM Manufacturing PMI hitting the highest level since the early 1980s. The faster-than-expected revival of both sectors has filtered through to March’s employment report, which was substantially better than anticipated across industries, with nonfarm payrolls climbing to 916,000 and the unemployment rate dropping to 6.0%.

The Biden administration’s tax proposal seeks to increase the corporate tax rate from 21% to 28%, repealing about half of the decrease from the 2017 Tax Cuts and Jobs Act. Consensus believes that the hikes will be meaningfully smaller (around 25%) than those proposed, due to Democrats’ slim majority in Congress and moderate Democrats who do not want excessive tax increases. As a result, the increase in tax revenue likely will not be enough to pay for the costly infrastructure plan plus the other stimulus that is expected to come; thus, the deficit will likely increase even further. This brings some investors to worry that increasing the deficit after the extreme spending measures brought upon by the pandemic can likely lead to greater inflation.