A Change In Equity Market Leadership Is A Positive

One favorable aspect of the current equity market is the broader favorable performance across a wider range of asset classes and investment styles. I wrote about this in mid September last year and at the time raised the question whether this rotation or change in leadership had more room to run. The below chart clearly shows that a shift in leadership has carried through the first quarter of this year. The blue line on the chart represents the average total return of the six stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google (GOOGL), Microsoft (MSFT) and Apple (AAPL). Collectively, these six stocks are trailing in performance relative to the other asset classes shown. Up until September though, the asset class returns were essentially reversed as seen in the second chart.

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The Consumer Is Spending, A Major Driver To The Economic Recovery

As is often said actions speak louder than words and with the consumer at the moment, both survey results and spending activity are moving in the same direction. The consumer accounts for 70% of GDP or the economy, so as the consumer goes, so goes the economy. Today's Conference Board Consumer Confidence reading for March is reported at 109.7, up from 90.4 in the previous month. Consumer confidence has yet to reach the higher pre-pandemic level, but it is moving up from its low after not declining as much as it did during the financial crisis. CEO confidence on the other hand is near a record high.

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Oil Inventory Level Remains High Potentially Limiting Steeper Rise In Energy Prices

A number of factors will influence the price of oil over time, but the supply level and active rig count provide useful insight. Other variables come into play as well, like Middle East conflicts and the level of the U.S. Dollar. The price of West Texas Crude has increased from around $15 per barrel in April of 2020 to its current $66 per barrel. On the surface it seems oil inventory levels are at a sufficiently high level, as the green line in the below chart indicates, that oil prices should not continue to trend higher at a pace similar to the pace over the last year. With the rig count beginning to turn higher, additional oil supply will eventually find its way onto the market; however, there is a lag in oil production growth vis-à-vis rig count growth.

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Equity Market May Be Entering A Period Of Further Strength

Going back to 2016 I was writing about the current bull market that began in 2013 and how it resembled the bull market of the 1950's and 1980's. At the time of those earlier posts I certainly did not foresee the pandemic and a .5% yield on the 10-year U.S. Treasury. Nonetheless, as this current recovery unfolds, a rise in the 10-Year U.S. Treasury yield has occurred and may continue. Higher interest rates in and of themselves are not necessarily a headwind for stocks though, especially when rising from a very low level.

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Earnings Growth Supports Strong Equity Market Advance

Fourth quarter 2020 earnings reports are nearing an end as 495 companies in the S&P 500 Index have reported results. Refinitiv's report dated March 5, 2020 notes results have come in better than history. Nearly 80% of companies have reported earnings above analyst estimates, exceeding the long-term average of 65%. Expectations for the next two quarters shows earnings growth accelerating with the second quarter 2021 estimate currently indicating growth of 51.2% on a year over year basis.

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Spiking The Punch Bowl

A nearly $2 trillion Covid relief package is working its way through Congress. There is differing commentary about the amount of the stimulus that is going to "Covid" relief, but assuming much of it is relief in some form or the other, how does it get spent? Is the relief targeted? In aggregate the stimulus that has been sent to individuals prior to this most recent package does not all seem to have been spent. The below chart shows the spike higher in the savings rate, currently running over 20% of disposable personal income.

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Economically Sensitive Stock Market Sectors Lead Performance

A look at S&P 500 Index sector returns after the market close on Thursday shows since the March 23, 2020 low, energy is the top performing sector up 117.6% and followed by materials and financials. The industrial and technology sectors round out the top five performing sectors as seen below.

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