Taxiing or Take Off?
“Contradictions do not exist. Whenever you think that you are facing a contradiction check your premises. You will find that one of them is wrong.” Ayn Rand from “Atlas Shrugged”
There it was on the front page of the April 30th edition of The New York Times. “U.S. Economy’s Strong Start Signals a Stellar Year.” One year ago, who would have thought that our journey through Covid would have led to unbridled economic optimism, predictions of accelerating growth and booming financial markets with the euphoria only slightly tempered by concerns about rising inflation and interest rates?
Like red flags to bulls investors certainly appear to be drawn to rising prices. The plurality of those expecting rising versus declining equity prices has risen from 8% in January to 22% in March and 64% in April. They are bearish though on the bond market with 65.2% expecting interest rates to rise and only 7.9% the reverse, the lowest since March 2019 and possibly not coincidentally prior to a 1% decline in rates the following four months. The prospect of higher mortgage rates though has not discouraged the public from its plans to purchase a home with that number now at 8.9%, the highest since April 2002. Nor have prospective buyers been dissuaded from those plans by the need to pay more for what they plan to purchase with the Case-Shiller home price index charging forwards at a 17.6% annualized rate the past five months through April, the highest rate since the 2003-2007 bull market run in residential real estate.
A more careful examination of the current state of our reality though may reveal a somewhat more complex state of affairs. 16.56 million of us are still receiving unemployment benefits, eight times their pre-pandemic level. Government benefits now represent a 28% share of personal income contrasting with 16% pre-pandemic. In the first quarter of this year wage and salary income rose by $156 billion, a mere one-fourteenth of the $2.25 trillion in transfer payments received in the quarter. Perhaps this explains the variance in the level of optimism in how we view our present and future. The Conference Board’s Consumer Confidence Index rose to 121.7, a significant improvement over the 109.0 level in March. (The pre-pandemic level was 132.6). Deconstructing that index though between its present and expectations (i.e., future) subcomponents, reveals future expectations declining to a five-month low. Finally, the shipments of durable goods (goods not for immediate consumption) have trended downwards on a quarter over quarter annualized rate from 33.1% in Q3 2020 to 18.3% in Q4, 10.3% in Q1 2021 and 1.8% in April.
Investors would have been hard pressed NOT to have made money in April. Looking over a list of fifty-eight indices only TWO were negative, India and Japan, both Covid related. The S&P was +5.29%. That pesky variance with the Dow Jones Industrial Average persists which was +2.69%. The November 2020 reversal of that year’s prior market leadership (Small Cap versus Large Cap, Value versus Growth, Energy versus Technology etc.) which showed signs of reversing last month persists with Growth +6.83% and Value +3.65%, Small Cap up only a third of the S&P rise at 1.85%, Foreign Developed Markets +2.95% and Emerging Markets +1.20%. Energy, up 31.7% for the year, was barely positive at +.7% and Technology, up 7.7% for the year (versus the S&P’s 12.0%) was +5.20%. The 60 (equity)/40 (fixed income & cash) portfolio returned 3% for the month and is now +7.3% year to date with the equity portion returning +4% for the month.
Mark H. Tekamp, May 2, 2021