Searching for Direction
US stock markets were only slightly lower on the week as a heavy volume rally on Friday pared losses from previous sessions. Earnings season is underway, and we’ve now seen 121 S&P 500 companies that have already reported. So far, top line numbers have been positive. Over 75% of reporting companies have beaten earnings and revenue estimates.
Increasing costs have also been a theme, and we are seeing more companies pass on higher costs to consumers. According to Schwab Chief Investment Strategist Liz Ann Sonders, “although earnings season has a ways to go, the results have been strong enough to significantly boost growth expectations, while also easing some valuation concerns.” In addition to upbeat earnings news, several positive global and domestic April business activity reports kept the macro recovery theme in play while strong housing numbers contributed to the positive economic narrative.
According to the Department of Housing and Urban Development and the U.S. Census Bureau, March single-family new home sales rose 20.7% from February to a 1.02 million seasonally adjusted annual rate. This represents the fastest sales pace since September of 2006, and is leading to speculation of a rekindled housing bubble. The torrid pace of new home sales demonstrates that, for now, ultra-low mortgage financing and incredibly strong demand are overcoming home price increases primarily due to the absolute surge in lumber prices. Lumber has been one of the standout examples of the broad commodity and other input price increases seen throughout the economy of late. The price of lumber has increased roughly 300% since March of 2020, but, as Logan Mohtashami, HousingWire’s lead analyst, said in a recent article, “Don’t forget, rates beat lumber in the paper, rock, scissors game.”
On the other side of the mostly positive economic news, markets were contending with concerns that continue to crop up amid reports of increasing Covid cases around the world. Perhaps most significantly, palpable market pessimism greeted news that Washington may be fixing its gaze on a hefty capital gains tax increase. The reports of possible capital gains hikes come on top of the previously indicated corporate tax increase tied to the funding of the Biden Administration’s proposed $2 trillion plus infrastructure bill.
Debate over the infrastructure bill has been intense from the start, but ratcheted up further this week when, on Thursday, Senate Republicans released their own infrastructure bill counteroffer. The key differentiating factors of the Republican version are its size, spending focus, and the means of financing. The Republican proposal amounts to a $568 billion package that is about a quarter of the size of the Biden plan. It also narrows the focus of spending primarily towards transportation infrastructure, broadband communication, and various water related projects. In addition, Republicans propose to pay for their plan with unspecified “user fees” as opposed to the Biden plan’s corporate tax increases.
In the oil patch, crude oil stockpiles recorded a small drawdown to 594,000 barrels this week, while gasoline stocks saw an 86,000 barrel build. Distillates also recorded a drawdown to 1.1 million barrels. Meanwhile, US production is holding steady at 11 million barrels. US rig counts fell for the first time since March, declining by 1 to 343, while gas rigs held steady at 94. Rig counts had been increasing for five weeks in a row, but according to Baker Hughes, the total rig count is still 27 rigs, or 6%, below this time last year. OPEC+ is also scheduled to meet next Wednesday, April 28th.
Ten-year yields continued the consolidation we’ve seen throughout April, and will need to be watched closely here for any indication of either a more lengthy corrective retreat or a resumption of the big move higher in yields that started last August. Many other areas of the market will likely react to developments in the direction of yields. The US 10-year yield dropped 1 bp to close the week at 1.58%
The dollar treaded water most of the week before Friday selling pressure brough the index to new lows for this recent multi-week decline. The dollar index ended the week at 90.84, down 0.76%.
As for other weekly performance, in the precious metals space, the yellow metal was down 0.13%, silver was down 0.08%, platinum was up 2.02%, while palladium was the standout again in the space, up 3.04%. The HUI gold miners index lost 0.59%. IFRA, the I Shares US Infrastructure ETF, was up 0.25%. Energy commodities were mixed on the week. Oil dropped 1.66%, while natural gas prices surged 5.22%. Oil services stocks (OIH) struggled this week, dropping 4.01%. The CRB Commodity Index was up 1.48%. The Dow Jones US Real Estate Index ended the week up 1.88%, while the Dow Jones Utilities index was down 0.59%.
Have a great weekend!
Chief Executive Officer