Plimoth Investment Advisors Logo Market Update from PIA  |  MAY 2021

Thinking Fast and Slow

Thinking Fast and Slow is a book published in 2011 by Nobel prize winner Daniel Kahneman in which he describes his view of behavioral biases relating to decision‑making. It is an interesting read worthy of consideration for a summer reading list, perhaps out on the beach in a post‑COVID‑19‑vaccine world. This book title comes to mind after listening to a number of discussions following the statement at the conclusion of the latest Federal Open Market Committee (FOMC) meeting held during the final week of April. Reminiscent of a classic Seinfeld episode, the discussions revolved around the “nothing” that came out of the latest statement; nothing new at least. The economy is off to an incredibly fast recovery following the recession of the first half of 2020, while the Fed continues to stick steadfastly to its slow response to unwinding monetary stimulus. The Committee is understandably “not even thinking about thinking about” raising interest rates anytime soon but is also reticent to comment about when tapering bond purchases may occur. Meanwhile, $120 billion of bonds continue to be purchased per month which further bloat the Fed balance sheet, now standing at $7.4 trillion. At some point, the slow‑moving Fed will need to acknowledge that tapering bond purchases is necessary considering the fast‑moving economy.

Laptop showing financial charts.

Investor Optimism Remains High

The booming economy and fast‑paced rollout of COVID‑19 vaccines have been formidable tailwinds to investor confidence, driving major stock indices further into record territory. The main concerns most frequently cited by investors seem to be related to tax reform and spending policies being considered in Washington. Although corporate tax hikes have historically not led to stock market sell offs, any strain to the bottom line of companies is worthy of consideration by investors. A change in capital gains tax policy for individuals is another area being closely watched. For now, the focus seems to be on modifications for the highest income earners (those earning more than $1 million per year.) Although the data is mixed on potential impacts of such a change, any disincentive to investment must be considered with respect to possible impacts on financial asset values.

Market Index Returns April 2021 YTD 2021
S&P 500 Index 5.3% 11.8%
Russell 2000 Index 2.1% 15.1%
MSCI EAFE Index 3.0% 6.6%
Barclays US Agg. Bond Index 0.8% -2.6%
FTSE 3 Mo. T‑Bill Index 0.0% 0.0%

Financial Markets Continue to Race Ahead in the Second Quarter

The S&P 500 surged by 5.3% in April, modestly edged out by the technology‑focused Nasdaq Composite return of 5.4%. Market strength was well diversified across growth‑oriented and economically cyclical sectors. Communication Services, Consumer Discretionary and Financials were the standout winners in a month in which all sectors had a positive return. Small cap stock returns took a backseat to large cap in the month, but the Russell 2000 had a respectable return of 2.1% and continues to lead year‑to‑date results, higher by a remarkable 15.1%.

Corporate earnings reports for the first quarter have thus far surpassed even the most bullish analyst projections, despite numerous cautionary comments mentioning inventory shortages and pricing pressures. With 60% of S&P 500 companies having reported first quarter earnings through the end of April, 86% have reported results that have significantly outpaced Wall Street estimates by 22.8%, an enormously wide margin. A lack of guidance on expected future results by company managements during the pandemic has led to analyst forecasts being way off the mark.

S&P 500 Sector Returns April 2021 YTD 2021
Communication Services 7.9% 16.6%
Consumer Discretionary 7.1% 10.4%
Consumer Staples 2.2% 3.4%
Energy 0.6% 31.6%
Financials 6.6% 23.5%
Healthcare 4.0% 7.3%
Industrials 3.6% 15.4%
Information Technology 5.3% 7.3%
Materials 5.3% 14.9%
Utilities 4.3% 7.2%

Second‑highest Economic Growth Since Apple Launched its iTunes Music Store

Economic data releases continue to grow increasingly positive, painting a picture of a very strong recovery in the coming quarters. The initial estimate of first quarter Gross Domestic Product (GDP) was a rock solid 6.4%. Other than the 33.4% spike in GDP in Q3, 2020 as businesses began reopening, you would need to go back to 2003 to find a reading this high, when an Apple iPod was considered cutting‑edge technology. Economic output in the U.S. has now nearly fully recovered from the pandemic lockdowns.

Retail Sales exceeded lofty expectations, surging 9.8% in March. Reports from the prior two months were revised modestly upward as well, bringing the three‑month average growth to a very healthy 4.9%. The spending boom was broad based across a variety of areas, led by a 23% increase in the purchase of sporting goods, 18% on clothing, 15% on motor vehicles and parts, and 12% on building materials. As the great reopening continues, restaurant and bar sales were higher by 13%. Consumer Confidence readings have reached the highest level since the pandemic began.

Rising home prices and forbearance programs have led to distressed home sales all but disappearing. Inventory of new and existing single‑family homes for sale continues to fall off as houses are snapped up as quickly as they are listed. The continued rise in building materials costs will only further the dramatic rise in prices. Lumber futures have reached an all‑time high and are roughly four times higher than the typical price this time of year. Skyrocketing prices and increased borrowing costs will eventually erode buyer demand, but we have not seen signs of that yet.

First Quarter Earnings Scorecard is a Winner Thus Far

The monthly featured chart. Source: FactSet

The “green on the screen” in the chart above paints a very rosy picture for company earnings exceeding lofty analyst expectations. Significant beats of both revenue and earnings forecasts have impressed even the most bullish investors. Income statement strength was spread broadly across sectors and industries.

Looking Ahead

Although potential tax policy changes remain the topic of the day, we need to keep in mind that the proposals being discussed are merely an initial plan from the current administration. We would expect to see ample negotiation and changes before any of the proposals under consideration become law.

The incredible strength of corporate earnings thus far in 2021 and impressive economic recovery continue to give fundamental investors reason to be enthusiastic. While continued new highs stretch stock market valuations, stellar corporate earnings go a long way to back up the optimism.

Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.