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
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.
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.