Stocks had another strong performance in April, with the S&P 500 Index adding 5.2%, its biggest one-month gain since November.
We remain encouraged by many factors that continue to support stocks. Policy makers remain very accommodative with monetary policy and fiscal stimulus that is supporting economic growth. Consumers are healthy and gaining confidence while corporate profits are surging, which supports business spending and hiring plans. We are also encouraged by the market internals where cyclical sectors that are highly levered to an improving economy continue to show leadership.
Stimulus Boosts Income and Spending
Personal income shot up a record 21.1% in March, while disposable personal income rose an even stronger 23.6%. Both reflected the passage of the $1.9 trillion American Rescue Plan, including extended unemployment benefits and direct stimulus checks
to most households. Similar to previous rounds of fiscal stimulus, net government transfers surged 147.2%. All other income sources also gained on the month. Notably, employee compensation was up 1.0%, the most since last August, a sign of continued
improvement in labor market conditions.
With income up substantially, spending and saving were also very healthy. Personal consumption expenditures (PCE) rebounded 4.2%, while the personal saving rate nearly doubled from the previous month to 27.6%, the second highest level on record, surpassed only by the lockdown saving rate last April. Consumers have accumulated more than $2.0 trillion in excess savings over the past year, representing significant pent-up demand. As the pandemic fades, we anticipate this excess savings will be unleashed, bolstering the pace of spending growth and the broad economic recovery.
Consumer Confidence Surges
Given very healthy income and savings, the successful
vaccine rollout and reopening, it’s no surprise consumer confidence is showing a strong rebound. The Conference Board’s Consumer Confidence Index jumped 12.7 points in April to 121.7, well above the consensus of 112.5. The index hovered
near its pandemic low for most of last year, but is now at its highest level since February 2020, and is consistent with above-trend economic growth. Just in March and April the index surged 31.3 points, the biggest two-month gain since April 1974.
We expect further gains in confidence as the pandemic fades and the labor market continues to heal.
Corporate Earnings Also Surging
On March 31, first-quarter earnings-per-share for the S&P 500 Index was forecasted
to grow 20%. With three-quarters of results in, it is on track to finish up 44%. Surprises have been strong across the market including Financials (34%), Cyclicals (32%) and Technology (28%). Notably, 57% of companies have also beat on sales, the
highest rate on record.
While earnings are the fundamental underpinning for stock prices, these strong earnings results are also important for business confidence, future corporate spending, and importantly hiring plans. Encouragingly, as part of their first-quarter earnings reports, many firms are announcing substantial new growth initiatives, which supports our positive outlook for labor markets.
Federal Reserve (Fed) Remains Highly Accommodative
At the Federal Open Market Committee meeting last week, the Fed reiterated its extremely accommodative policy with Chairman Powell stating that the Fed is not even ”talking about talking about tapering.” Consequently, the Fed will continue
to purchase Treasury securities at a pace of $80 billion per month, and agency mortgage-back securities at a pace of $40 billion per month for the foreseeable future. This is an extremely accommodative monetary policy and is very supportive of economic
growth and a positive backdrop for stocks and other assets.
Economic Growth is Very Strong
First-quarter economic growth came in at 6.4% with nearly all components increasing. Personal consumption expenditures (PCE)
jumped at a 10.7% annual rate, the second most since the fourth quarter of 1965, exceeded only by the initial resurgence after the lockdown last spring. Importantly, the outlook for the second quarter is even stronger, supported by massive fiscal
stimulus, vaccines, and reopening. The Atlanta Fed’s GDPNow model is calling for a stunning 13.2% growth rate for the second quarter. This should provide further support for corporate profits and stocks.
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