May Day, the ancient festival of Spring is finally here and so are the first months of emerging from the stifling nature of living through a pandemic. The heart of earnings season began this past week and so far companies are profitable but are signaling that higher inflation is in the pipeline and there are still issues in acquiring raw goods for production. There are already signs of inflation as housing prices reach new highs, gasoline is at two year highs, food prices are at 10 year highs and commodity prices keep pushing up. The Federal Reserve made little mention of policy change in their meeting this week but that may change by the end of the year if cost pressures are persistent (my opinion).
If you are wondering why the growth companies have been trading sideways for three months than look no further than the chart of the IWM which is the Russell 2000 ETF. This ETF holds companies that should have above average growth prospects and the sideways action is frustrating, but it signals consolidation before the next move higher. The price action did wedge (yellow lines) and it looks like the early stages of a breakout are underway. A move above the previous high at $235 would signal growth companies will have a good May.
The S&P 500 has had a nice move higher since March and has been consolidating the last two weeks. The end of month was weak but there was an overbought condition to work off so a bit lower may be next, but 4100 area should hold as strong support.
Overall, the market is still pointed higher and these two indices could line-up in the first half of May. I think we continue to get the same story in the coming weeks from earnings – things are improving and prices are going up.
Chart of the Week!
8 million tonnes of plastic ends up on the world’s oceans every year but how does it get there? There are multiple ways plastic comes into direct contact with the sea including the wind, drains and illegal dumping. Rivers are the primary conduit as 90% of all plastic waste entering the world’s oceans from only ten rivers.
Economic & Central Banking Snippets
- Easing restrictions and government stimulus powered the economy to a 6.4% annualized growth rate for GDP in the first quarter. The chart to the right shows the current trajectory verses the post-financial crisis period. (WSJ)
- The April Chicago Manufacturing Index jumped to a better than expected 72.1 from 66.3. 1983 was the last time we saw such an extreme level. “Anecdotal evidence suggested an anticipated increase in business activity, partly because firms are overbuying due to raw material shortages.” (Boockvar)
- Consumer spending on durable goods such as cars and computers typically comprises 7% of GDP but accounted for almost half Q1’s growth. That highlights a weakness in the economy as producers can’t meet demand as shortages hamper supply. This means that the spending was filled from inventories and imports. Excluding trade and inventories, total demand grew almost 10% annualized. Economists at Jefferies wrote: “While production and shipping bottlenecks will likely persist, they are unlikely to get worse. We also expect demand to rotate from goods to services, where supply constraints are not as binding.”
- Core durable goods orders in March rose 0.9% m/o/m – about half the estimate of +1.7%.
- The Euro-Zone economy contracted in Q1 due to coronavirus restrictions amid a third wave of coronavirus infections. Gross domestic product fell by 0.6% last quarter, according to preliminary data released by Europe’s statistics office Eurostat. (Investopedia)
Macro Snippets
- While some invest in Bitcoin, Kansas City Chiefs tight end Sean Culkin is taking it a step further. He decided to convert his entire base salary, $920,000, into the cryptocurrency. (WSJ)
- Ford Motor warned the financial toll from the continuing global computer-chip shortage will likely worsen. The auto maker said the lack of semiconductors will cut $2.5 billion from adjusted pretax profit this year and force it to cut second-quarter production in half. Ford expects the situation to improve after June, however. (WSJ)
- Copper topped $10,000 a metric ton for the first time since 2011, nearing the all-time high set that year as rebounding economies stoke demand and mines struggle to keep up.
- Next week’s heavy lineup includes consumer staples and food giants like Kellogg and Clorox. We can expect them to comment on inflation and how rising commodity prices are forcing them to raise prices. Now that health officials are talking about the possible need for annual vaccinations, anti-virus makers like Moderna, Pfizer, and Johnson & Johnson may be sitting on their next blockbusters.
That is all for now and thank you for being a subscriber!
Regards,
President – Kisco Capital