May Economic Update
Several robust economic reports and a healthy start to the corporate earnings season helped to move stocks higher for the month of April. Data released to support signs of an economic recovery included an impressive jobs report, a jump in retail sales, and a pickup in housing starts. In addition, the accelerating pace of vaccinations helped investor sentiment. The Dow Jones Industrial Average gained 2.71% while the S&P 500 Index picked up 5.24%. The Nasdaq Composite led, climbing 5.40%. (1,2,3,4)
Corporate Earnings Reports
Investors were anxious to see what first-quarter profit reports would hold when reporting began mid last month. With over 40% of S&P 500 companies who have already reported, the earnings-per-share growth is now estimated to be 29.3%; well ahead of the 12.2% EPS growth rate that analysts had expected at the start of the year. (5,6)
Surprisingly, stocks traded mostly sideways during the second half of April which may imply these stellar earnings reports were already priced into the market. The solid run-up during the first half of the month did hold for an impressive month-over-month return supported by these reports.
The Federal Reserve
As expected, the Federal Reserve announced that its current monetary policies would remain unchanged until the labor market has fully recovered, in addition to inflation meeting the Fed’s stated goal of an average of 2%. (7)
"Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” said Federal Reserve Officials in a prepared statement following the two-day policy meeting which ended on April 28.
The Fed’s position has been that any inflation will be transitory (i.e. temporary), requiring no change to its current monetary stance. However, the biggest worry for investors is that the Fed may be misreading the current rate of inflation. Many analysts see inflation layered into the economy - from the prices of crops and lumber to metals and industrial products – which has caused apprehension that inflation may not be fleeting.
President Biden announced last month that he supports a capital gains tax increase for wealthy Americans. Under the current law, the highest long-term capital gains tax is 20%. Biden’s proposal would increase that amount to 39.6% for anyone making more than $1 million, nearly doubling the current tax rate for top earners. The news prompted worries that stocks could come under pressure this year if such an increase were to go into effect for tax year 2022. While this is only a proposal and negotiations with Congress will likely lower this amount, it is an issue that will be closely watched by Wall Street moving into the latter part of this year. (8)
Signs of realized inflation will also be closely watched with prices in lumber and agriculture commodities reaching new heights in April. Increased demand for building and supply chain disruptions have largely been attributed to these price increases. Consumers have thus far been largely reluctant to pay higher price increases forcing manufactures and producers to incur a large proportion of these price increases. However, recent data has shown the prices of finished goods are starting to rise. These trends will be closely monitored as the purchasing power of the dollar may diminish due in large part to the Federal Reserve’s current inflation mandate.
Monthly Financial Tip:
Consider setting up a system to record your tax deductions and credits throughout the year. This may save you time come tax season next April.
1. The Wall Street Journal, April 30, 2021
2. CNBC.com, April 2, 2021
3. CNBC.com, April 15, 2021
4. Reuters.com, April 16, 2021
5. FactSet.com, April 26, 2021
6. EarningsScout, April 30, 2021
7. The Wall Street Journal, April 28, 2021
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.