April 16, 2021
Records continue to be broken with the Q1 2021 earnings season commencing this week. Financial giants Goldman Sachs and JPMorgan led the way with better-than-expected results. Strong performance in equities trading, investment banking, and the releasing of reserves that had previously been set aside for potential bad debt during the pandemic allowed them to easily crush analyst expectations. Favorable economic reports also helped to fuel bullish sentiment. Retail sales rose a resounding 9.80% in March resulting from $1,400 stimulus checks landing in consumers’ pockets. Bond investors also had something to cheer about this week with the U.S. 10-year treasury yield continuing its slide to 1.59% on Friday – down from a recent high of 1.75%. Modest core consumer price growth also reassured bond investors that inflation remains at bay, keeping the Fed from needing to hike rates earlier than forecasted. In overseas news, China reported solid economic growth. Aside from valuations, there was very little to be negative about this week, and the S&P 500 rose 1.37% to a new record high of 4,185.47.
Retail Sales Surge on Stimulus Check Spending
Armed with $1,400 stimulus checks and fresh from having been vaccinated, consumers were ready to spend those dollars. Retail sales surged 9.80% in March, reversing February’s -2.70% weather-induced slide. Spending was broad-based, led by sporting goods, up 23.50%. Clothing and accessories and motor vehicle parts and dealers sales also registered strong gains, up 18.30% and 15.10%, respectively. The pandemic-battered bar and restaurant industry also got a Covid vaccine boost, up 13.40%. The impetus is obvious. Consumers are ready to get back to normal and enjoying life again. The report also suggests consumers are feeling confident about their current employment prospects, allowing them to splurge a little of their stimulus dollars on themselves rather than sock it away for a rainy day. With average daily Covid cases now 25% of what they were just a quarter ago, consumers are coming out in greater numbers, which should propel the economy well through the summer.
Bond Bulls Cheer Modest Core Consumer Price Growth
Wall Street had been eagerly awaiting the most recent consumer price report, seeking early signs of inflation. Consumer prices rose 0.60% in March, bringing the year-over-year (yoy) gain to 2.60%. Despite the figure being over the 2% “magic” number, the headline figure itself is somewhat misleading. The rise was driven primarily by a surge in gasoline prices, up 9.10% during the month. Higher demand from businesses and consumers as Covid restrictions have loosened has resulted in more movement and a subsequent rise in energy prices. Supply also remains lower as a result of producers not having restored their production to pre-pandemic levels. Excluding volatile energy and food prices, core consumer prices were only up 0.30% in March or 1.60% year-over-year – below the Fed’s 2% target level. Both, bond and growth stock investors cheered the news, averting the need by the Fed to alter its accommodative stance.
China GDP Continues Its Post-Pandemic Recovery
China Q1 GDP soared 18.30% year-over-year. This was a near mirror image of the slump it experienced a year ago when it became the first country to impose strict social distancing restrictions in response to Covid-19. While it is an impressive figure, it should be noted that it is being compared to a low comp. since many businesses were closed in Q1 2020. A deeper dive into the quarterly figures show that China’s Q1 2021 economic performance is not as impressive as the overall headline might suggest. Looking at quarter-over-quarter GDP growth, China’s economy rose 0.60%. This was slower than the 2.60% increase experienced in the final quarter of 2020. Subdued domestic demand and tighter competition with other global exporters resuming operations led to the slower growth rate. China still believes it will reach its 6.00% 2021 GDP growth goal, however, as the global economy accelerates.
We’ve said it before. It is easy to be bullish when you have an accommodative monetary policy, massive stimulus, solid consumer sentiment and an opportunity to finally spend money. This was all reflected in the market’s performance this week, supported by a strong start to earnings season and economic reports that put naysayers at ease. So far 84% of the companies in the S&P 500 that have reported have beaten expectations. This compares to the long-term average of 65% who typically “beat” and 76% from the prior four quarters. Earnings are accelerating faster than analysts have expected and that is translating to higher highs for markets. The question in these situations is always when will the market top. The markets started rallying last March in anticipation of where we were headed, and it continues to rally now that we’re here. The concern is always that the market’s expectations are beyond what companies can deliver, but so far it has been the other way around. This then leads to the other concern – inflation. Hereto, not only are the inflation figures tame, but the Fed has stated – and the market now seems to accept – that rates are not going higher, even if inflation does pick up temporarily. So, the entire script is about as perfect as it gets, which leaves those of us that have lived through three or four crashes, looking for warning signs and broad excess. What ultimately may break the rally, as one analyst put it, may not be actual bad news, per se, but rather the absence of good news. If this week’s earnings reports are any indication, that day is still some ways off.
The Week Ahead
The Q1 2021 earnings season continues with reports from some of the biggest names in healthcare, consumer staples, and technology. We’ll also dive into the latest existing and new home sales reports. Sales have been strong throughout the pandemic but could run into some formidable headwinds amid tight inventories. In overseas news, the Eurozone will release its latest figures on manufacturing and services.
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Why Business Owners Need a Buy-Sell Agreement
Going into business with a partner or partners is a lot like entering a marriage: there will be good times and bad. Every business partnership should have a buy-sell agreement in place as part of a clearly defined succession plan. It’s like a pre-nuptial, but for a company.
A buy-sell agreement is an arrangement between business partners regarding what will happen if a partner leaves the company, either voluntarily, such as retirement, or involuntarily, such as a disability or death. Additional circumstances that might trigger a buy-sell agreement include personal bankruptcy, divorce, and disagreement. The buy-sell agreement would clearly dictate the circumstances surrounding potential ownership transition if or when the occasion arises.
A buy-sell agreement should be created early – well before it is needed and when owners can amicably, rationally, and strategically consider various scenarios and establish how the process will work under those conditions. It should be created in the best of times to address what may happen in the worst of times. Below are some consideration for business owners.
Death: In the event of an owner’s death, a buy-sell agreement would prohibit the deceased owner’s family from selling the shares to an outside party. It can also help the remaining owners avoid being in business with a deceased partner’s spouse or children who could otherwise inherit the shares. Life insurance policies are often used in buy-sell agreements so there is cash available to purchase the deceased owner’s shares. A well-structured agreement will have a detailed, pre-determined pricing mechanism set forth which removes the burden of negotiating a purchase price with any heirs.
Retirement: Many buy/sell agreements only address the death of an owner, but there are many other scenarios to consider, such as when a partner wants to retire or exit the business. In this situation, the agreement will outline the terms under which the remaining partner(s) or the business would purchase shares from the exiting partner.
Disability: If an owner becomes disabled, a buy-sell agreement could facilitate a buyout option for the business or the remaining owners. The agreement would specify how disability is defined which could be a long-term illness or injury or a mental illness that prevents a partner from working. It may be structured to include provisions for the injured or sick owner to continue receiving income.
Divorce: In a divorce settlement, an owner’s former spouse may be awarded a portion of the company. A buy-sell agreement will often allow the divorcing owner to have the first option to purchase his or her interest back from his or her soon-to-be ex-spouse. If the divorcing owner chooses not to exercise this right, then the agreement will often provide the remaining owners with the option to buy the interest from the divorcing owner’s spouse. The agreement avoids the risk of (a) having to manage the business alongside a co-owner’s ex-spouse or (b) losing control of the company altogether.
Disagreement: Businesses sometimes dissolve when owners can’t agree on company matters. Buy-sell agreements can outline what will happen if the owners cannot continue their partnership. It is much simpler and less expensive to agree on the terms ahead of time than to face protracted legal battles which could be detrimental to the ongoing operations of the business.
An effective buy-sell agreement should anticipate the intent and the needs of the owners. It should describe when and how to dispose of an owner’s interest, the sales price and how the price is determined, who the remaining owners are willing to accept as a substitute owner, and how a business sale will be funded, such as through cash or insurance proceeds. These considerations protect the partners and the business. It is recommended that business owners consult with a CPA, attorney, and a financial advisor on a buy-sell agreement and then reevaluate the terms every three to five years.