US equities came into May looking to build on last month’s gains, propelled by a tailwind of robust economic data and earnings beats.
April was the best month for US stocks since the election and more than 95% of S&P 500 constituents currently trade above their 200-day moving average.
Multiple are stretched on virtually every conceivable metric (updated figure, below, from Goldman) and skeptics see froth, bubbles and trouble around every turn. So, same it as it ever was, I suppose.
Inflation is at the forefront of seemingly every market conversation as commodity prices surge and reports of supply chain disruptions are rampant.
The color accompanying final reads on April manufacturing PMIs from Europe (out Monday) was chock-full of price pressure anecdotes. “Product shortages helped to drive input prices up at a rate beaten only once in the survey history,” the bloc-wide survey said, flagging rising prices for chemicals, metals, and plastics. “Alongside growing confidence in the outlook, companies rais[ed] their own charges to the strongest degree in over 18 years of data availability.”
“Eurozone manufacturing is booming [but] supply constraints are also running at unprecedented levels, leading to a record build-up of uncompleted orders at factories,” Chris Williamson, Chief Business Economist at IHS Markit remarked Monday. “The consequence of demand running ahead of supply is higher prices being charged by manufacturers, which are now also rising at the fastest rate ever recorded by the survey.”
This comes as the bloc grapples with a double-dip recession. European officials have struggled to control virus outbreaks and the ECB would desperately like to see fiscal policy do at least some of the heavy lifting via jointly-guaranteed bailout funding. Notably, 30-year yields in Germany rose to 0.38% Monday. That was the highest since July of 2019.
Stateside, it’s the usual debate: Will the inevitable spike in inflation be “transitory” or persistent?
“On one hand, the Fed finally acknowledged there are supply side constraints in the economy and they are contributing – and will continue to contribute – to inflation (at least in the short term), but they are not to be worried about over the medium- to long-term,” BNY Mellon’s John Velis wrote, referencing Jerome Powell’s “bottleneck” comments from the April FOMC presser. “We think this is a very strong assumption being made in the FOMC boardroom and have our doubts they will be resolved as seamlessly as the Fed thinks,” Velis added.
You’re reminded that the level of public concern depends heavily on education and income. The figure (below) is familiar to regular readers, but I never tire of highlighting it. It’s derived from NY Fed survey data.
Crucially, it’s not that undereducated Americans don’t understand how inflation works due to some college course they missed. Rather it’s the opposite. Lower educational attainment is associated with lower incomes, and the less money you make, the more likely you are to spend a sizable percentage of your disposable income on items for which prices are rising. Insult to injury is the fact that lower- and middle-income Americans own hardly any stocks (relatively speaking), which means price pressures aren’t offset by portfolio gains.
Despite myriad (and multifarious) warning signs, I’d caution against betting that some manner of “reckoning” or dramatic derating for equities is in the offing. As noted here over the weekend, the market’s response to earnings beats and red-hot data has been muted, and that may continue to be the case as investors ponder whether this is “as good as it gets,” so to speak. But assuming that presages a steep decline and that such a move is imminent could be a fool’s errand.
“We suspect the market’s underwhelming response to good earnings is indicative of investor concern that the strength of earnings and the economic data raises questions about the sustainability of the economic momentum,” JonesTrading’s Mike O’Rourke wrote Sunday evening.
“Investors take profits in an ‘as good as it gets’ environment, but this environment is multiple levels beyond that,” O’Rourke went on to say, adding that “in essence, it’s a year’s worth of suppressed demand being unlocked in an environment that is artificially turbo charged by policy, mak[ing] the ‘sugar high’ following the global financial crisis look like child’s play.”
