At a glance
Economic growth trends moderated in April after stimulus benefits aided March. Positive economic activity is benefitting stock and corporate bond investors.
U.S. Bank Global Health Check
The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.
Source: U.S. Bank Asset Management Group, May 17, 2021.
Number of the week:
51.2%
The increase in U.S. retail sales in April 2021 compared to April 2020.
Term of the week:
Price-earnings ratio – The ratio for valuing a company that measures its share price relative to its per-share earnings. It is also sometimes known as the price multiple or the earnings multiple. P/E ratios are used to determine the relative value of a company's shares.
Quote of the week:
“Core CPI, which excludes fuel and food, posted the largest monthly increase since 1981 and the largest year-over-year increase since 1996. The surge may prove to be transitory, with measures of “stickier” prices yet to show substantial acceleration. According to Bloomberg, five categories accounted for 60 percent of monthly price increases: Used cars, rental cars, lodging, airfare and food away from home.”
- Robert Haworth, CFA, Senior Investment Strategist, U.S. Bank
Global economy
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Key points:
hides details
- The Consumer Price Index (CPI) accelerated sharply in April. Core CPI, which excludes fuel and food, posted the largest monthly increase since 1981 and the largest year-over-year increase since 1996. While consumers’ inflation expectations rose, as measured by the University of Michigan confidence survey, the surge may prove to be transitory, with measures of “stickier” prices yet to show substantial acceleration. According to Bloomberg, five categories accounted for 60 percent of monthly price increases: Used cars, rental cars, lodging, airfare and food away from home.
- U.S. retail sales missed analysts’ estimates in April, with the headline measure remaining flat compared to March, while sales excluding autos and gasoline declined. However, upward revisions to March’s strong spending accounted for much of the April “miss,” and data remains choppy and subject to revisions. Overall, retail sales are up more than 50 percent compared to this time in 2020 and above pre-pandemic levels in 2019, supported by ongoing stimulus and reopening measures.
- U.S. small businesses are recovering slowly, judging by the National Federation of Independent Business Small Business Optimism Index. A large concern among businesses remains the lack of qualified applicants to fill open roles, influenced by ongoing unemployment assistance and remote learning as the school season draws to a close.
- U.S. manufacturing continues to improve, with industrial production increasing in April but at a slower pace than analysts’ forecasts. Overall, industrial production remains 2.5 percent below pre-pandemic levels in April 2019, reflecting supply constraints in key components such as semiconductors for the auto industry.
Equity markets
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Key points:
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- Year-to-date performance is superb and broad-based, but performance in May is subdued. The S&P 500 appears to be in consolidation mode, retreating 1.4 percent last week and 0.2 percent in May as of Friday’s close. Despite last week’s volatility and pullback, the S&P 500 is only five days removed from and roughly 1.4 percent below its all-time high of 4,232. Periods of volatility and sideways-trending price action are within the normal ebb and flow of an upward-trending market.
- Cyclical-oriented sectors are outperforming while Information Technology continues to lag. All 11 S&P 500 sectors are posting gains for 2021, led by the cyclical-oriented Energy, Financials and Materials sectors. The subdued performance of Information Technology, the largest sector in the S&P 500 representing roughly 26 percent of the index’s value, stands out. It is the worst-performing sector for the year, though still up 4.1 percent, while retreating 2.7 percent so far in May. While lagging near-term, the longer-term growth prospects of this sector remain intact, driven by e-commerce, artificial intelligence, machine learning, mobility and cloud computing. Information Technology was the best-performing sector in 2020, advancing 42.2 percent.
- Sales and earnings are exceeding expectations as the first quarter reporting period draws to a close. Roughly 90 percent of S&P 500 companies have released quarterly results. Sales, up 9.8 percent compared to last year, and earnings, up 47 percent, are exceeding estimated growth rates of 6.2 percent and 23.9 percent, respectively, according to Bloomberg and FactSet.
- Higher earnings are providing valuation support and the basis for stocks to drift higher. The consensus earnings estimate for the S&P 500 in 2021 is just over $186 per share, according to Bloomberg, FactSet and S&P Global. The index trades at roughly 22.5 times the $186 consensus estimate, a level we deem to be elevated yet short of extremes. We are watching inflation closely, because it typically results in lower price-earnings multiples, leading to lower stock prices.
Bond markets
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Key points:
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- Fed communication focused on its expectation that higher inflation will be short-lived, while weak employment necessitates accommodative monetary policy. Higher-than-expected CPI and Producer Price Index (PPI) data released last week challenged the Fed’s commitment to maintain accommodative monetary policy. Multiple Fed officials pushed back and reasserted they will not reduce accommodation soon. If inflation continues to surpass expectations, it will be increasingly difficult for the Fed to maintain accommodative policy, which creates further upside potential for long-term Treasury yields and downside potential for prices.
- Falling corporate bond default expectations justify low yields and high valuations. Low borrowing costs, high cash balances and improving business conditions have decreased corporate bond default expectations below long-term averages. No U.S. corporate bond issuers defaulted in April, according to Moody’s, a credit rating company. Despite their low incremental yield over Treasuries, corporate bonds have room to outperform, because defaults have been infrequent. Similarly, municipal bonds possess high valuations justified by strong credit fundamentals and persistent investor demand.
Real assets
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Key points:
hides details
- Real Estate traded in line with the broader market last week, while Utilities and Infrastructure both outperformed by 1 percent. Data centers and apartments were top performers among real estate investment trusts while retail and office properties lagged. Forward prospects for real estate remain mixed; reopening should benefit prior laggards, such as hotels and retail properties, but future demand appears unclear for many other property types.
- Domestic crude oil prices rose 0.75 percent last week, with domestic inventories experiencing a smaller decline than expected. Higher prices and stronger demand signals are supporting Energy sector equities relative to the broader market.
This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation. The Producer Price Index, published by the Bureau of Labor Statistics, is a group of indices that calculates and represents the average movement in selling prices from domestic production over time. The National Federation of Independent Business Small Business Optimism Index is a composite of 10 seasonally adjusted components. It provides an indication of the health of small businesses in the U.S., which account of roughly 50 percent of the nation's private workforce.
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