At a glance
Despite recent softness in markets, we expect economic growth and corporate earnings to tick higher over the course of the year. Consumer spending remains solid despite labor market uncertainties.
Roughly the number of Americans receiving unemployment benefits.
Term of the week
Volatility – A statistical measure of the difference in returns for a given security or market index ― in other words, large price movements over a short period of time. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
“We raised our S&P 500 year-end price target from 3,960 to 4,320. Our target is based on a price-earnings multiple of 24 times earnings of $180 (above consensus estimates), 10 percent above Friday’s close of 3,913, and within a range of 4,625 (25 times earnings of $185, 18 percent above Friday’s close) and 4,025 (23 times earnings of $175, 3 percent above current levels).”
- Terry Sandven, Chief Equity Strategist, U.S. Bank
- Consumer activity remains strong, with U.S. retail sales rising 6 percent in February compared to last year, prior to the pandemic’s onset. The control group retail sales, which excludes volatile items and contributes to official gross domestic product (GDP) calculations, was up 10 percent over last year. While fiscal stimulus continues to support current consumption, the labor market remains a longer-term concern. More than 18 million Americans continue to receive jobless benefits, and we have yet to see a significant reduction in jobless claims.
- U.S. industrial production decelerated in February compared to January and declined 4 percent compared to February 2020. Weather-related disruptions across the U.S. played a significant factor in the slowdown, so it will be of greater concern if March data (released mid-April) doesn’t reflect a strong rebound.
- Housing market activity decelerated after a huge pickup that began in April 2020. Housing starts fell 10 percent in February compared to January and 9 percent year-over-year. Permits for new homes fell almost 11 percent. Meanwhile, the National Association of Home Builders Housing Market Index fell slightly, from 84 to 82, but remains near the all-time-high of 90 reached in November 2020, suggesting that homebuilders remain optimistic.
- Global economic sentiment improved further. The U.S. ZEW survey of investors’ current assessment of the economy improved sharply to the best reading since the pandemic began, while expectations for future growth also rose. Eurozone sentiment improved also, though not as sharply. Overall, European expectations for future economic growth surpassed the previous post-pandemic high of expectations reached in September 2020. Meanwhile, expectations for future growth in Japan improved to levels not seen since the 1990s.
- Volatility is likely to be the norm for the foreseeable future. While not our base case, stronger-than-anticipated inflation would likely be accompanied by increased volatility; inflation and higher interest rates typically result in valuation compression and more subdued equity returns.
- Cyclical sectors lead year-to-date performance. The outlooks for both cyclical and strong secular sectors are compelling. Energy, Financials and Industrials ― cyclical sectors that tend to move with the overall economy ― are the best-performing sectors year-to-date, all beneficiaries of a resurgence in economic growth. Consumer Staples, Utilities and Information Technology are the worst-performing sectors, all in negative territory. The subdued performance of technology companies is perhaps most surprising given their strong, long-term growth characteristics.
- Earnings are trending higher. Consensus earnings for 2021 and 2022 are approximately $174 and $200 per share, respectively, with upside bias, according to Bloomberg, FactSet and S&P Global. The first quarter reporting period begins in mid-April. At current levels, the S&P 500 trades at 22.5 times the consensus 2021 estimate, a level we deem elevated yet short of extremes when compared to past periods of similar inflation levels.
- We raised our S&P 500 year-end price target from 3,960 to 4,320. Our target is based on a price-earnings multiple of 24 times earnings of $180 (above consensus estimates), 10 percent above Friday’s close of 3,913, and within a range of 4,625 (25 times earnings of $185, 18 percent above Friday’s close) and 4,025 (23 times earnings of $175, 3 percent above current levels). Our preliminary 2022 year-end price target is 4,600, 17.5 percent above Friday’s close, based on a multiple of 23 times earnings of $200.
- The Fed reaffirmed its plan to maintain low interest rates and continue asset purchases. The Fed reminded investors that accommodative monetary policy remains appropriate because employment and inflation data are far from their targets. Investors continue to price in interest rate hikes much sooner than the Fed’s projections based on rapidly improving economic expectations, which is driving Treasury yields higher. Despite fundamental factors such as rising growth and inflation favoring higher Treasury yields, the Fed maintains the option to buy more (or longer-term) Treasury bonds if rising bond yields jeopardize the recovery.
- Nontraditional and lower-quality sectors are key to fixed income outperformance in coming months. High yield corporates, bank loans, structured credit and mortgages not backed by the government offer investors the opportunity to increase bond portfolio yield while diversifying credit risk across categories. Taxable investors can increase yield by increasing exposure to high yield municipal bonds, which offer non-taxable coupon payments. Incremental yield over Treasuries is low in most bond categories relative to the past, but we believe they could remain low for some time. Our expectation for low but stable yields over Treasuries, infrequent defaults and strengthening credit fundamentals favors increasing credit exposure to generate incremental yield return.
- Real Estate traded in line with the broader market last week, while Infrastructure trailed by 1 percent and Utilities beat the S&P 500 by 0.50 percent. Industrial properties and hotels led real estate investment trusts while data centers and retail properties lagged. We believe these defensive sectors of the market are likely to remain under pressure this year.
- Domestic crude oil prices fell 6.5 percent last week as negative headlines about European pandemic lockdowns and lower U.S. demand forecasts drove price action. Crude oil is still up 27 percent on the year. Energy sector equities trailed the broader market by 6.5 percent, but is still the top-performing sector this year with a total return of 31 percent.
- Gold and silver both rose 1 percent last week. We believe the most likely moves in precious metals will be lower. As nominal and real interest rates move higher, we expect investors will seek better opportunities elsewhere.