Stocks continue to make new highs, with the S&P 500 Index up 2.7% last week, as economic readings continue to show an accelerating economy supported by reopenings, vaccines, and massive government stimulus.

 Last week brought encouraging readings on the service sector of the economy while labor market indicators suggest that significant job gains are likely in the months ahead.

These strong economic indicators are leading to upward revisions to economic growth estimates, highlighted last week by the International Monetary Fund’s (IMF) upwardly revised forecast to 6.4% economic growth for 2021 (the Federal Reserve recently raised its estimate to 6.5%). This better-than-expected economic growth supports corporate profitability, which ultimately supports stock prices. Sectors well positioned for strong economic performance include Financials, Energy, Materials, and Industrials.

Business Surveys Suggest Strong Service Sector Rebound

The ISM Non-Manufacturing Index (a timely business survey of the service economy) jumped in March to a record high, and above the consensus, as services activity boomed amid more vaccinations and more easing of COVID restrictions. It was the second-biggest increase since data started in 1997. All 18 ISM industries reported growth, a sign of a broad-based expansion. All of the survey components surged, with business activity and new orders growing at record rates while employment expanded at the fastest pace since May 2019.

Similar to the manufacturing survey, the service sector continues to deal with supply chain issues and shortages which are leading to near-term inflationary pressures that we view as transient. We expect service sector growth to remain elevated due to pent-up demand, stimulus checks, and increased optimism as the vaccine rollout continues.

This survey is now consistent with the strength we have been seeing in manufacturing activity. In addition, the combined manufacturing and service surveys are consistent with above-trend economic growth—similar to the IMF and Federal Reserve levels mentioned above of about 6.5%.

We are also seeing international business surveys paint an optimistic outlook. The J.P. Morgan global composite PMI (a combined global manufacturing and service sector survey) came in at 54.8 (readings above 50 signal expansion, below 50 signal contraction), a remarkable improvement from its April 2020 low of 26.2. Despite vaccine rollout challenges and further lockdowns, the eurozone composite PMI moved further into expansionary territory at 53.2. China’s composite PMI was also expansionary at 53.1, although it remained lower than at the end of 2020 due to new COVID-19 restrictions. These surveys show global economic growth is beginning to accelerate.

JOLTS Report Points to Future Labor Market Gains

The Job Openings and Labor Turnover Survey (JOLTS) showed job openings increased 3.8% in February to 7.4 million, up in four of the past six months, and to the highest level since January 2019 and well above the pre-COVID peak. For perspective on this rapid improvement, it took five years after the low in job openings in the aftermath of 2008’s financial crisis to move above the pre-recession level, versus less than a year this cycle. This speaks to the success of the rapid monetary and fiscal policy response to the pandemic.

The improvement was led by more job openings in some of the industries that were hit the hardest by the pandemic, such as health care and social assistance, accommodation and food services, and arts, entertainment, and recreation. Hiring also increased, up 5.0% to 5.7 million, led by food and accommodation services. The industry leadership in job openings and hires reflects the accelerating vaccination rate and more business reopenings, and suggests further significant job gains in the coming months.

This week brings several important consumer health indicators including retail sales, the consumer price index and consumer sentiment. Earnings season also starts in earnest with several major banks reporting.

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