Stocks made new highs again last week, with the S&P 500 Index up 1.4%. Incoming economic readings continue to show an accelerating economy supported by reopenings, vaccines, and massive government stimulus.

Last week’s data impressed with retail sales surging, jobless claims tumbling (finally), housing rebounding, and OECD global leading indicators improving. Earnings season got off to a strong start and we expect accelerating economic readings to result in healthy profit gains which provide the fundamental support for stock prices.

Retail Sales Surge

Retail sales jumped a broad-based 9.8% in March, above the consensus of 5.6%, driven by an influx of household income from the $1.9 trillion American Rescue Plan, and more vaccinations and reopenings. Retail sales surged at a 34.7% annualized rate in the first quarter, the second most on record. On a year/year trend basis, retail sales shot up 14.7%, the fastest pace since February 1979. The better-than-expected sales readings are leading to upward revisions to economic growth estimates with the Atlanta Fed’s GDPNow model estimating 8.3% growth for the first quarter.

Jobless Claims Finally Show Significant Decline

Initial claims for unemployment insurance dropped 193,000 last week to 576,000, the lowest level since March 2020, and well below the consensus of 705,000. The four-week average of claims shifted down to 683,000, also the lowest level in over a year, indicating a notable trend decline in layoffs. We expect significant labor market improvement to continue in the coming months as industries hard hit by the pandemic see activity normalize.

Housing Rebounds From Severe Winter Weather

Housing starts rebounded 19.4% in March to a 1.7 million unit rate, the highest level since June 2006 while building permits picked up 2.7% to a 1.8 million unit annual rate. On a y/y basis, housing starts increased 37.0%, while permits were up 30.2%, both indicating a notable pickup in construction activity. On a trend basis, starts and permits are at levels last seen in 2007. In addition, the NAHB Housing Market Index showed homebuilder confidence remains close to its highest level on record, and suggests continued strength in housing starts.

Consumer Sentiment Improvement Continues

The University of Michigan Consumer Sentiment Index rose to its best level in a year, and now stands 20.5% higher than a year ago, when most of the economy was on lockdown. We anticipate further gains in consumer sentiment as the pandemic fades and economic activity normalizes.

OECD Leading Indicators Point to Strengthening Recovery

The OECD U.S. Composite Leading Indicator (CLI) saw its 11th consecutive gain in March, indicating above-trend growth for the first time since December 2018. On a y/y basis, the CLI is up the most since July 2010, suggesting that the economic recovery should continue to strengthen in the coming months.

In addition, global CLIs continue to strengthen in most major economies. In Japan, Canada and the euro-area as a whole, particularly in Germany and Italy, the CLIs now point to a steady increase. In France, and now the United Kingdom, the CLIs signal stable growth. Among major emerging economies, the CLIs for India, Russia and China continue to expand at a steady pace, but in Brazil, the CLI points to slowing growth.

Earnings Season Strong Start

First-quarter earnings season kicked off last week and many of the large banks significantly exceeded consensus expectations. In a sign of confidence in the future, the largest banks released a sizable chunk of their pandemic loan-loss reserves, signaling that the credit storm has passed. 63% of S&P 500 market cap will report during the next two weeks.

We expect the earnings outlook to remain positive. Encouragingly, earnings projections have been revised higher for this year and the acceleration in economic indicators bodes well for profitability with earnings leveraged to economic momentum. We continue to favor deep cyclical sectors that benefit the most from improving economic conditions, including Financials, Industrials, Energy, and Materials.

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