Don’t Let Facts Get in the Way of a Good Rally

May 7, 2021

The S&P 500 registered its 26^th record high of the year as April nonfarm payrolls missed expectations with businesses adding 266,000 workers to the payrolls. Although the number was an average reading in normal times, it badly missed the 1 million new hires Wall Street had expected given the broad reopening currently underway. Despite the miss, stock investors cheered the news, along with the downward revision to March’s payroll gains, believing the softer figures will take the heat off the Federal Reserve to lift interest rates sooner than expected in order to control a hot economy. The unexpected jobs miss comes the same week that manufacturing and services sector readings soared once again. For the week, the S&P 500 added 1.23% to a new record high of 4232.60.

April’s Expected Hiring Boom Goes Bust

The jobs report was widely expected to show that 1 million workers were added to the payrolls in April. By all indications, the economy looked well on its way to hitting that mark following earlier reports that showed initial jobless claims fell below the 500,000 level just last week. Markets were surprised as the Labor Department announced only 266,000 hires were made in April. That’s a sharp decline in new hires from March’s 770,000 and February’s 536,000 prints. April’s miss was driven by businesses shedding jobs in areas that had performed well during the pandemic. Temporary jobs were reduced by 111,000, while support services fell 15,000. Courier jobs also fell 77,000 while manufacturing shed 18,000 from its payrolls. The weaker than expected jobs report resulted in the unemployment rate holding steady at 6.1%. That too missed consensus estimates of 5.8%. The jobs report did have a few bright spots, with the battered leisure and hospitality industry added 331,000 workers to the payrolls during the month. Wage inflation also remained in check with average hourly earnings remaining relatively flat year-over-year as low wage earners returned to the workforce. Overall, investors cheered the report as it shows a slower jobs recovery will take the heat off the Federal Reserve to lift interest rates sooner than expected to combat rising wage inflation.

Manufacturing Expands Despite Rising Prices and Supply Shortages

U.S. manufacturing continued to expand in April although at a diminished rate amid rising prices and supply shortages. The Institute for Supply Management Manufacturing Index fell to 60.7 in April from a 38-year high of 64.7 in March. Numbers above 50 indicate expansion in the manufacturing sector while numbers below 50 indicate contraction. Figures above 60 are considered to be exceptional. Robust customer demand in recent months has led to surging prices with steel in particular seeing strong price increases which served to push the headline number lower in April. Some of the price increases have been attributed to Trump’s steel and aluminum tariffs. More than 300 manufacturers are now seeking relief from surging prices as they have petitioned the Biden administration to remove the tariffs in order to keep price hikes from hurting customer demand. Rising prices pushed the ISM’s price gauge to a 13-year peak which was twice as high compared to the prior month. Aside from surging prices, a supply crunch also made it difficult during the month for businesses to procure supplies, produce their own goods and ship to customers quickly. Despite the hurdles, business remained brisk for manufacturers as the index for new orders registered 64.3 which is an extraordinarily high level that is seldom matched. Also, for the first time since 2014, all 18 major industries tracked by the survey reported they are growing. Overall, manufacturing demand is booming and should continue to remain robust provided prices and supply logistics challenges remain manageable.

Services Sector Continues Post-Covid Recovery

The services sector continued its recovery as more Americans spent on services that were restricted during the pandemic. The ISM Services Index hit 62.7 in April, down slightly from an all-time high of 63.7 in March. Like the manufacturing sector, supply constraints weighted on the sector with the supplier deliveries index increasing to 66.1 from 61.0 the previous month. Prices also edged up to 76.8 from 74.0. Demand remained robust with the business activity index registering 62.7 while the new orders index hit 63.2. Employment also strengthened during the quarter, with the index increasing slightly to 58.8 from 57.2 in March. The services sector is primed to continue its recovery and break its March all-time high as more consumers seek to take full advantage of the upcoming summer vacation season.

Just about all news seems good to investors these days. Positive manufacturing and services readings support the notion that demand is robust and will remain so. April’s jobs stumble had a silver lining – the Fed won’t dare raise rates so long as unemployment remains above pre-pandemic levels. Meanwhile, CPI (less food and energy) hasn’t really budged, while commodities (ex-petroleum) are 35% higher than before the pandemic – sitting at their highest levels in ten years amidst a low interest rate environment with lots of savings still on the sidelines. Federal debt, as a percentage of GDP, has gone from 106% pre-pandemic to 130% today, and household debt has surpassed 2008 levels for both mortgage and non-mortgage classifications. The only saving grace in this is that while the nominal value of household debt is at historical highs, the total household debt service as a percentage of disposable income is materially lower than it was during the last debt crisis (13% in 2008 versus 9.5% today), sitting at its lowest levels since the Fed started publishing in 1980. It is difficult to reconcile the macro readings and calm the markets with the anecdotal evidence of rising inflation and speculation, however. Every business owner we talk with speaks of tight conditions, backlogs and rising costs which business owners are now needing to pass along to their customers. Asset valuations are high in general with certain segments looking downright frothy, but sentiment is strong and earnings have a tailwind. We can’t help but believe systemic pressures are building but until they manifest in the broader macro reports, markets are likely to ignore any calls for caution and bulls will sustain momentum as we near the year’s halfway point.

The Week Ahead

All eyes will be on inflationary pressures with the latest reports on consumer and producer prices. We’ll also see if the consumer spending momentum can continue with the release of April retail sales.

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Planning Strategies to Explore Now

The current political and economic environment makes it very likely that we will see legislative changes that could have a significant impact on many estate plans. These anticipated changes make this year an opportune time to review a range of planning structures and tools that could help mitigate the impact of new tax laws. With this in mind, Probity Advisors, Inc. has prepared a Wealth Planning Guide to help individuals plan ahead and accomplish estate planning and wealth transfer goals. This year’s planning guide addresses the following topics:

Wealth Planning in the Current Environment including potential tax law changes that may have a big impact on your estate and on your family and heirs

Using Trusts and Partnerships in Your Estate and the benefits of various types of individual, family, and business structures to help meet planning and wealth transfer goals

Managing Your 401(K) and options for individuals who change jobs and may need to take action regarding a workplace savings plan

Your Financial Wellness Checklist to help you stay on track with important aspects of your financial life

If you’re a client of Probity Advisors, Inc., you should have received a copy of the guide in the mail. If you are not currently a client, you can review the guide on our website here. If you would like a copy mailed to you or if you know someone who might benefit from receiving a copy, please call our office at (214) 891-8131 or email us at info@probityadvisors.com.

Please note that the Probity Advisors, Inc. Wealth Planning Guide is designed to enhance collaboration and overall communication between clients and their advisor(s). It’s not a substitute for in-person meetings with our office or with an attorney, but instead is designed to empower clients to initiate and steer important discussions with family members as well as with advisors.

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