April 9th, 2021
Markets kicked the second quarter off on a high note with the S&P 500 index hitting another all-time high on Friday. Growth stocks outpaced value stocks as the 10-year U.S. treasury yield retreated to 1.66%, down from a recent high of 1.75%, and on continued optimism for the U.S. post-Covid economic recovery. Friday’s blockbuster jobs report showed that businesses added new hires at the strongest pace since August 2020. The strong hiring data helped to offset a paradoxical rise in jobless claims reported earlier in the week. The services industry reported strong momentum in March with the ISM Services index rallying to an all-time high of 63.7. The report follows last week’s record-setting ISM report on manufacturing which surged to its highest level in more than 37 years. In overseas news, China’s services sector showed that its domestic economy is beginning to gather steam, helped by business optimism and increased hiring. The week’s reports continued to paint a story of mounting momentum that lifted the S&P 500 2.71%.
Blockbuster Jobs Report Offsets Rise in Jobless Claims
Business sentiment remains high as businesses boosted their payrolls by 916,000 in March. That was the largest increase in new hires since August 2020. Employment gains were broad-based, led by increases in the hardest hit sectors during the pandemic. Leisure and hospitality added 280,000 to the payrolls. Bars and restaurants followed with 176,000 new jobs, while arts, entertainment and recreation added 64,000. The payroll gains helped push the unemployment rate down to 6.00% in March, down from February’s 6.20%. Average hourly earnings did tick down slightly – falling -0.10% – the first such drop since June. The strong jobs report more than offset the rise in jobless claims this week. Jobless claims increased 16,000 from the previous week to 744,000. The rise was attributed to an administrative backlog in filings and the recent spikes in Covid cases in a few states. More broadly, however, the jobs market continues to head in the right direction and the expectation is that we will achieve full employment by year-end.
Services and Manufacturing Sectors See Spring Bounce
The ISM Services index surged to 63.7 in March, up from February’s 55.3 reading. March’s reading was the index’s highest reading in the survey’s history. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. Demand was strong with new orders rebounding to an all-time high in March, reversing February’s weather-induced slump. The strong services report follows last week’s ISM manufacturing report which soared to its highest level in more than 37 years in March. The ISM Manufacturing Index rose to 64.7 from 60.8 in February. Gains were broad-based with 17 of 18 industries reporting growth.
China’s Services Sector Rises on Improved Business and Consumer Optimism
Improved business optimism and increased hiring in the services sector helped lift the Caixin/Markit Services Purchasing Managers’ Index to 54.3, the highest since December. That’s up from February’s reading of 51.5. Higher domestic demand led to business activity and overall sales posting their strongest increases in three months. In a sign that the momentum may continue, Chinese business expectations for the year ahead rose to their highest level since 2011. China was the first major economy to emerge from the pandemic, but its economy has been idling while the rest of the world has caught up. With most developed nations having now done so, optimism over China’s future growth prospects have improved.
The first full week of trading in Q2 brought additional gains for stock investors, pushing the S&P 500 to a year-to-date gain of 9.90%. While Q1 was a strong quarter, dominated by economically sensitive stocks responding to the reopening theme, Q2 may prove more challenging. Markets will have to balance strong business investment and rising consumer spending against capacity constraints and tightening employment which could lead the Federal Reserve to lift interest rates sooner than expected. The central bank continues to maintain its low interest rate mantra even after the most recent blockbuster jobs report and as virtually all other readings suggest the economy will soon be running full speed. As such, inflationary concerns will remain top of mind – certainly for bond investors – and equity markets could get jittery along with them. For the time being, however, we appear to be in the “just right” zone from a data standpoint and there is a feel-good bias shaping investors’ sentiment that is likely to remain in place until such time that the market believes the Fed will actually move on rates.
The Week Ahead
Traders will be watching consumer prices like a hawk for signs of growing inflationary pressures. Retail sales figures will also be on the radar as the latest round of stimulus checks hit consumers’ pockets in March. Overseas, China will be among the first of the world’s major economies to release Q1 2021 GDP results.
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Cicadafest 2021
A rare and remarkable phenomenon of nature is about to take place. Billions of Brood X cicadas living underground for the past 17 years are about to emerge over several weeks in May and June. There may be as many as 1.5 million per acre in parts of the Midwest and eastern United States from as far north as Michigan and down to Georgia. Other states where they are expected to emerge include Kentucky, Tennessee, Ohio, Maryland, Virginia, Pennsylvania, New York, and New Jersey.
Of the 3,000 species of cicadas around the world, only seven species share synchronized life cycles that allow them to come out simultaneously every 13 or 17 years. Those that synchronize their emergence are called periodical cicadas, and they are only found in the central and eastern U.S. There are 15 broods of periodical cicadas in the U.S., and 12 of them, including Brood X, pronounced “Brood ten” because they are labeled with Roman numerals, emerge every 17 years while the rest appear every 13. Brood X is the largest of the broods that emerge every 17 years. Periodical cicadas have one of the longest life cycles of any insect. Scientists are still trying to unlock the mysteries of their lengthy, prime-numbered life spans.
The timing of the appearance of Brood X cicadas varies by location. They are ready to emerge but waiting for the soil to be consistently 64 to 65 degrees for several days. Cicadas don’t bite and are harmless to humans, however, they will be flying, landing, and crawling everywhere. The insects have ecological benefits in that they effectively prune larger trees when laying their eggs in small branches, but they can be harmful to smaller trees and younger trees. They serve as a food source for birds and other animals, they help aerate the soil when they tunnel to the surface, and when they die, they release nutrients back into the soil.
Adults live for only a few weeks, during which time they mate and lay their eggs. A single female can lay up to 500 eggs. Eggs hatch into nymphs and drop to the soil where they burrow down to feed on xylem, a watery fluid from roots. Cicada nymphs continue to develop underground until they emerge near the end of their life cycle.
A chorus of cicadas can produce sounds up to 100 decibels — about as loud as a lawnmower or motorcycle — during their brief time above ground. Some call it the soundtrack of summer. Budding entomologists can help researchers by reporting sightings using the Cicada Safari app, a free crowdsourced app that can help locate Brood X cicadas. Citizen scientists can submit photos or videos of cicadas they find to the app for researchers to verify and plot, thus making scientific contributions. After the year we’ve had, Brood X’s emergence from underground isolation is both a weird and fascinating diversion from our pandemic lives.