Weekly Digest: Good is bad, up is down

The classic chicken and egg question 

Given the promising employment data we’ve seen in the forms of weekly jobless claims reaching new pandemic lows, the market was expecting a really strong April employment report. In an unfortunate turn of events, we only created 266k new jobs in April, compared to the expectation of 1 million new jobs for the month. With this, the unemployment rate inched higher to 6.1%, instead of falling to the 5.8% expected by the market. The bad news continued as March’s initially reported 916k gain was revised downward to 770k. 

Moral of the story: Despite the jobs report being so incredibly bad, markets didn’t really react negatively and stocks somehow reached record highs because this bad news was viewed as good news on the monetary policy front – it gives the Fed the ammunition needed to continue their accommodative policies, which fuels easy growth. This report might also be more an indication of a shortage of labor supply – a lot of employers are struggling to hire enough staff to actually keep up with demand because unemployment insurance is still providing a better alternative to many. Until the unemployment benefits run out, we might not really be able to get a true recovery in the labor market. But until the labor market really shows signs of recovery, the Democratic federal government is unlikely to end the elevated unemployment benefits. 

Supply chains out of whack 

The services side of the economy grew for the 11th month in a row in April as the ISM Services Index reached 62.7 (any number above 50 indicates growth), though it fell 1 point compared to the prior month. The April ISM Manufacturing Index, while reporting a growth environment with a 60.7 headline reading, fell 4 points compared to last month. Across both manufacturing and services industries, demand continues to rise but record-long lead-times, wide-scale shortages of input materials, increasing commodities prices, and challenges in logistics and human resources are seriously impacting deliveries and therefore depleting inventories. Another commonality between both indices was the appearance of price inflation. 

Moral of the story: Lower inventories were a massive negative contributor to our first quarter GDP number, and it seems like that’s continuing into the second quarter as well. The higher and higher prices are pointing to an inflationary environment as the economy starts to recover in a more meaningful way throughout the rest of this year. 

Earnings so far

Earnings season is nearing the end as 88% of S&P 500 companies have reported their results. Of the companies that have reported results, 86% have come in ahead of analysts’ expectations, which is the highest beat we’ve seen since 2008. The better-than-expected results are largely coming from the financial, information technology, communications services, and consumer discretionary sectors. 

Moral of the story: Companies are comparing their results this year to their COVID-driven (lack of) results last year, so it makes for an easy low base to grow from. Analysts are projecting double-digit earnings growth throughout the year and it seems like the reopening of the economy is set to support the lofty expectations. 

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