Last week’s economic releases sent a confirmation signal for what the stock market has been indicating with its recent record highs—the economy is making a strong recovery from the pandemic shock.

We see lingering headwinds fading as the vaccine rollout accelerates, infection rates continue their rapid decline, and the economy ultimately fully reopens.

Retail Sales Benefitting from Stimulus

Retail sales spiked 5.3%, the most since last June, and far above the consensus of 1.2%. This more than made up for the decline in retail sales in the fourth quarter of last year, bringing the total sales volume to a new record high. Consumers benefitted in January from the $900 billion COVID relief package of late December that included enhanced unemployment benefits and stimulus checks.

All major retail sales categories posted strong gains, with several categories advancing by double digits. On a year/year (y/y) trend basis, retail sales were up 4.6%, nearly in line with the pre-recession pace. We anticipate consumer demand will remain strong in the coming months, as the vaccine distribution picks up and the economy reopens more fully. Estimates show excess consumer saving of about $2 trillion while the $1.9 trillion COVID relief bill now under consideration in Congress should provide additional fuel for retail sales.

Business Surveys Show Growth Accelerated in February

The Markit PMIs (timely business surveys) showed private sector growth accelerated in February. The services sector survey rose to its highest level since March 2015 and is up in four of the past five months. While the manufacturing sector survey was down for the first time since last April (partly due to extreme winter weather and supply shortages), it was still the second-highest PMI level since April 2010, indicating the manufacturing recovery remains robust.

Housing Remains a Bright Spot for the Economy

While housing starts fell in January (partly blamed on high lumber prices), building permits—a harbinger of starts to come—jumped 10.4%. This jump was the most since last July, to a 1.881 million unit annual rate, the highest level since May 2006. Moreover, the NAHB Housing Market Index (homebuilder confidence survey) continues to hover near a record-high level and suggests housing starts should continue trending up in the near-term.

Meanwhile, January existing home sales edged up to a 6.69 million unit annual rate, the second-highest level since April 2006. On a y/y basis, sales are up 23.7%, near the fastest pace since November 2009, with all four regions posting double-digit y/y growth rates. The months’ available supply held at a record-low 1.9, down from 3.1 a year ago. This suggests a strong need for additional new homes, to the benefit of future builder activity. Low mortgage rates, a shift toward suburban demand, favorable demographics, and pent-up demand support a positive housing market outlook.

Earnings Continue to Come in Better-than-Expected

With 89% of the S&P 500’s market capitalization reporting fourth-quarter results, earnings have surpassed estimates by an impressive 16.6% in aggregate, with 78% of companies beating their projections. While earnings were expected to contract by 11% at the start of earnings season, they are now set to expand by 4%—a huge accomplishment given the pandemic’s impact on the global economy.

For 2021, the S&P 500 earnings-per-share (EPS) is projected to grow 22% as the economy reopens. Cyclicals (Energy, Materials, Industrials and Discretionary ex-Internet Retail) and Financials are expected to lead the bounce back with EPS expectations of 65% and 22% vs. 17% and 10% for Technology and Non-Cyclicals.

Strong retail sales, business surveys showing acceleration, healthy housing indicators, and improving corporate profitability all bode well for the economic outlook and stocks—particularly cyclical stocks, including Financials, Industrials, Materials, and Energy.

Disclaimer
This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.

About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/