Weekly Market Update 05/03/2021
There’s plenty of good news to go around, with one release after another pointing to increasing levels of business activity. Leading the way as April closed out was The Conference Board’s March report on the Leading Economic Indicators (LEI), which rose 1.3%. That easily topped forecasts and marked a turnaround from February’s slight decline. Most impressive was that all 10 components in the LEI gained ground, an indication that economic momentum was building. Also showing improvement are new home sales, housing prices, durable goods orders, regional manufacturing surveys, consumer confidence, and weekly jobless filings.
Could we be getting too much of a good thing? To this point, the answer is probably no, as the shortages in labor and raw materials that often precede extended bouts of higher inflation are not indicated. Still, we have seen some pricing pressures. The rise in Treasury yields thus far this year, typically a suggestion of a possible uptick in inflation, will need to be watched.
Meanwhile, earnings also are coming in more strongly than forecast, with the improvement led by the financial services (notably the large banks), consumer related enterprises, and technology sectors. In all, the first quarter is shaping up as a good one for Corporate America. With the economy suggesting few weaknesses, the second period should be positive as well.
Investors like what they see, with the stock market shaking off some intermittent blues and continuing to head into uncharted territory. Multiple records have been set by the Dow Jones Industrials and the S&P 500 Index recently, and the NASDAQ has recovered from a late first quarter selloff, topping 14,000 once again.
Does this pattern indicate too much exuberance on Wall Street? At times there appears to be, with price-earnings ratios now pushing past 22, and dividend yields (which can be competition for Treasuries) holding below 2.0%. Further, although the fundamentals (a healthier economy and increasing profits) are compelling, the possibility of rising inflation and selectively higher capital gains taxes raise potential red flags.
Conclusion: We think some caution is in order, especially if the news on inflation and taxes is unsettling.