The consumer is healthy
And ready to run with the recovery.
The relatively modest 4.3% correction suffered by the S&P 500 over the past week—stocks declined from an overbought 4,238 last Friday to an oversold 4,057 on Wednesday—was healthy, anticipated and largely technical in nature. Benchmark 10-year Treasury yields similarly plunged to an overbought 1.46% last Friday, after which yields rose to an oversold 1.70% on Wednesday. Completing the trifecta, the volatility index (VIX) slipped below 17 last Friday, soared to nearly 29 yesterday, and is now back down below 20 today. All of this triggered a buyable bottom in stocks, in our mind, as we maintain our target price of 4,500 for the S&P, largely due to the accelerating strength in the U.S. economy.
Health care progress driving the bus As more states open up their economies and as more vaccinated Americans ditch their masks (per new CDC guidelines), economic activity should continue to strengthen from last year’s powerful V-bottom recovery. We believe the recession ended last May or June.
Labor market on fire Earlier this week, the Job Openings & Labor Turnover Survey (JOLTS) posted a record 8.12 million job openings in March. Initial weekly jobless claims hit a new 14-month cycle low yesterday, down 92% from their April 2020 peak. And the ADP private payroll survey hit a 7-month high in April. To be sure, these positive trends are very different from last Friday’s hugely disappointing April nonfarm payroll report. But 15 states (and counting) have since ended the federal government’s overly generous unemployment bonus, so payrolls should rise sharply in coming months.
‘Mapril’ retail sales robust While the Commerce Department reported breakeven retail sales at a record $619.9 billion this morning for April that were weaker-than-expected, it also revised March results higher to a month-over-month gain of 10.7%, the second largest in history. March results were likely goosed by the fiscal stimulus embedded in President Biden’s $1.9 trillion American Rescue Plan, so there should have been some spending consolidation in April from March’s outsized level. But because of the annual calendar rotation with Easter and Passover, we routinely look at March and April combined, comparing their results to the same year-ago, two-month period. While the combination this year soared 29.1% year-over-year (y/y) from depressed 2020 levels, it also was 21.1% above relatively normal results from the same period in 2019. In sharp contrast, Mapril 2019 gained 3.5% compared with 2018, which in turn was 4.4% stronger than Mapril 2017.
Savings elevated The personal savings rate averaged 6.6% over the past 20 years. But during the government-imposed lockdowns and massive fiscal stimulus during the global pandemic, the savings rate surged to a record high of 33.7% in April 2020 (though it eased to 27.6% in March). But as we shift from cabin-fever to a jailbreak economy this summer, consumers have plenty of dry powder to spend, which we expect will continue to fuel robust consumer spending.
EPS surging As a result of the aforementioned economic strength, corporate profits are surging. We’re 91% of the way through the first-quarter earnings season, and earnings per share (EPS) have risen nearly 47% y/y, roughly double consensus expectations, with 85% of the companies surprising by about 22%, the second-best beat rate on record. Second-quarter profits could be even stronger, rising some 60-70% y/y.
Inflation spiking Because of procedural base effects due to negative inflation readings from a year ago falling out of the y/y measurement, inflation was expected to rise over the last few months. But it’s done so at a pace even more swiftly than anticipated. The core retail CPI has risen from 1.3% y/y in February to 1.6% in March to 3% in April, while the core wholesale PPI has risen from 2.2% y/y in February to 3.1% in March to 4.6% in April. The core PCE, the Fed’s preferred measure of inflation, has risen from 1.4% y/y in February to 1.8% in March to an estimated 2.5% to 3% in April, to be reported later this month.
While the Fed believes that these spikes will prove transitory, we have a less sanguine view. Wages grew at an outsized annualized pace of 8.4% in last week’s April labor report, and commodity prices (such as lumber, copper, oil, corn and soybeans) have gone vertical over the past year. Companies will be tempted to pass those higher labor and commodity costs onto their customers in the form of higher prices, which we believe will be stickier and more sustainable than the Fed believes.
Confidence up, but… April’s consumer confidence measure soared from 109 in March to a much stronger-than-expected 121.7, a 14-month high. The Leading Economic Indicator leapt from a decline of 0.1% in February to a stronger-than-expected gain of 1.3% in March, which is just off a record high.
While the NFIB Small Business Optimism Index rose to a five-month high in April, it registered a weaker-than-expected gain to 99.8 from 98.2 in March. But the University of Michigan’s Consumer Sentiment Index, reported this morning, actually declined to a much weaker-than-expected preliminary reading of 82.8 in May (consensus estimate at 90) from 88.3 in April, as higher inflation concerns have impaired confidence.