The US stock markets were mixed last week, as the Dow (-0.4%) and S&P 500 (-0.4%) edged lower, while the NASDAQ (+0.3%) was up and reversed its five-week trend of lagging the S&P 500 index. Taxable bonds were virtually unchanged, but tax-free municipal bonds were up about 0.2%. The markets were down sharply for the first three trading days, but a strong recovery on Thursday and Friday helped them recover some or all of their losses from earlier in the week.
We are currently experiencing a tug-of-war with economic data. Inflation concerns have been dominating movements in BOTH the stock and bond markets, but nearly all other economic data continue to show an extremely strong and rapidly growing economy. Quarterly corporate earnings reports have shown their highest rate of growth since the global financial crisis (11+ years ago), as the US economy is rapidly recovering from the pandemic. The IHS Markit Manufacturing report demonstrated the highest manufacturing growth since 2009, but this positive news was offset by the Philadelphia Fed prices paid index (an indicator of inflation) at a 41-year high. Conversely, the US economy only gained 266,000 jobs in April, far less than the 1 million expected. Consistent with that data, April payroll growth was slower than expected, which seems unusual in an economy that seems to have an above-average labor demand. Hence, as noted in prior weeks, there is a struggle with filling jobs as many of those unemployed are making more with their supplemental unemployment benefits than if they were working. This phenomenon is also creating inflationary pressure, as supplies are not robust enough to meet the demand. Many economists feel that this should last for a few months and return closer to “normal”.
Here is an interesting chart that we review and analyze every month as we closely monitor the economy. This chart shows LEIs (Leading Economic Indicators) since 1969, and in almost every case, when LEIs decreased below 0%, it was an indicator of a forthcoming recession, which are shown as the gray area in the background of the chart. Of course, the pandemic was unpredictable, but the LEIs have finally turned positive in March and achieved a record in April 2021, following one of the steepest declines in decades. In short, this is another economic indicator demonstrating that the US market is on strong footing with a promising outlook. For those of you who are data geeks (like me), you can become mesmerized by the conclusions this chart offers, as it also shows the growth of the S&P 500 alongside the LEIs. See the chart below.