Highlights
• Inflation ticked up, with March’s U.S. headline Consumer Price Index rising 2.6% year-over-year and 0.6% month-over-month. Core inflation rose a more moderate 1.6% and 0.3%, respectively.
• Retail sales rose sharply by nearly 10% in March, as continuing jobless claims showed a steep decline from February to March.
• Reversing a trend that had been in place for much of 2021, the 10-year Treasury yield dropped significantly, ending the week at 1 .59%.
Stronger-than-expected economic news propelled stocks to new highs last week. Lower Treasury yields helped drive the outperformance of growth and momentum styles after those areas of the market meaningfully lagged value in the first quarter. The biggest sector winners this week were utilities, materials and health care, which each gained 3% or more. No sectors posted negative returns for the week.
Weekly Overview
• Despite rising global Covid-19 case counts, the bullish narrative for equities remains unchanged: Fiscal and monetary stimulus, vaccine distribution and solid market inflows have all been pushing equities higher.
• Utilities (3.7%), materials (3.3%) and health care (3.0%) led, while communication services (0.0%), energy (0.3%) and industrials (0.6%) were relative laggards. Large caps outperformed small caps last week.
• Per Bank of America, equity markets saw an additional $25.6 billion of inflows in March, bringing the total to over $600 billion over the past five months. Large caps and value styles were the largest beneficiaries, while small caps and growth experienced outflows.
Market Drivers And Risks
• Economic lift off? Retail sales, unemployment and manufacturing data were all positive last week and surpassed expectations
• The market reaction to the positive news was counterintuitive: Cyclical equities lagged and bond yields fell. Our interpretation is that a confluence of dovish Fed policy, ample liquidity and strong confidence levels has created a “melt-up” effect, prompting investors to buy anything that looks inexpensive. We believe this to be a short-term phenomenon and continue to favor economically sensitive areas of the market, which should do well when investors focus on earnings.
• Earnings results could argue for diversification. This earnings season may be one of the most highly anticipated in recent history given the increasingly high level of expectations paired with lingering pandemic-driven uncertainty. We think results will be solid, but expect peak earnings growth to occur in the second quarter, reflecting the positive economic data we anticipate over the next several months.
• Historically speaking, accelerating earnings growth tends to favor value and cyclical areas. This trend should be amplified by rising interest rates. However, these expectations may be already priced into the markets to some degree, leading us to favor a more diversified approach by focusing on high-quality growth and cyclical opportunities.
• Bank earnings look particularly solid. In early reporting, the first quarter earnings growth rate for the S&P 500 stands just below 30%. This is in line with our full-year expectations, which are slightly above consensus estimates.
• This uptick in growth has been largely due to bank results. Goldman Sachs, JPMorgan, Wells Fargo and Bank of America all reported strong results last week thanks to solid reserves and elevated trading revenues. Though fiscal and monetary stimulus have both been boosting results, we also think factors such as improved loan growth point to future strength for the industry.
Risks To Our Outlook
Headline economic data may create pockets of volatility, as inflationary shocks caused by short-term global supply chain disruptions and year-over-year comparisons will be difficult for investors to ignore.