Weekly stock market & economy recap

S&P 500 earnings update

The earnings per share (EPS) for all S&P 500 companies combined increased to $190.12 this week, an increase of +0.08% for the week and +19.6% year to date.

91.4% of S&P 500 companies have now reported Q1 results, 87% have beaten estimates by a combined 22.9% above expectations. (I/B/E/S data from Refinitiv)

The S&P 500 index declined 1.39% for the week.

The Price to Earnings (PE) ratio is now 22x.

The S&P 500 earnings yield is now 4.56% compared to the 10 year treasury rate of 1.63%. Although valuation is not a timing tool, stocks remain reasonably priced compared to fixed income alternatives.

Economic data review

The NFIB Small Business optimism index for April came in at 99.8, a gain of 1.6% for the month and +9.8% over the last 12 months. The index began reporting monthly data on January 1986, and the historical average is now 98.4.

8 of 10 index components came in higher than the prior month but there are some disappointing trends underneath the surface.

  1. “Small business owners are seeing a growth in sales but are stunted by not having enough workers. Finding qualified employees remains the biggest challenge for small businesses and is slowing economic growth. Owners are raising compensation, offering bonuses and benefits to attract the right employees. 42% of owners reported job openings that could not be filled, a record high reading. Owners continue to have difficulty finding qualified workers to fill jobs as they compete with increased unemployment benefits and the pandemic keeping some workers out of the labor force.”

2. “Owners are raising selling prices in frequencies not seen since the late 1970s and early 1980s, a period of our highest inflation rates in modern history. Inflation was running at double-digit rates and interest rates reflected the expected inflation. The 10 Year Treasury bond carried a 15% coupon. Today, it is at 1.5% and inflation is very low. This can change very quickly. We don’t have inflation until it shows up on Main Street, but it is beginning to do so.”

3. The percent of owners expecting better business conditions over the next six months fell seven points to a net negative 15%, surprisingly glum.

The Consumer Price Index (CPI) increased +0.8% in April, an increase of +4.2% annualized (up from +2.6% annualized last month). The biggest increases coming from energy (oil & gasoline) prices, +25.1% to +49.6% annualized. You’d have to go back to September 2008 to find a higher annualized CPI.

The Consumer Price Index minus food and energy costs (Core CPI) increased +0.9% in April, an annualized increase of 3.0% (up from +1.6% annualized last month). Much worse then expected and the highest annualized Core CPI reading since 1995. The biggest gains coming from the used cars & trucks and transportation service categories, up +5.6% and +21.0% annualized respectively.

In fairness, these annualized results are lapping the height of the COVID recession numbers. So I don’t want to make too much out of one month. I’ve been noting the small business and ISM reports rise in input costs for months. That, combined with the historic increase in the money supply, means it was only a matter of time before those price increases showed up on main street.

The Producer Price Index (PPI) increased +0.6% in April (worse then expected), and now stands at +6.1% annualized (up from +4.3% annualized last month), which is the highest annualized PPI since the data set began in November 2010.

Total Retail Sales came in at $619.9 billion in April, relatively unchanged from the prior month. March numbers were revised upwards, from +9.7% to +10.7% annualized. Current results are now +17.7% above the pre-COVID highs.

Total retail sales are up a whopping +51.2% above April 2020 results. Nothing even close to this growth rate since the data set began in the early 1990’s.

Industrial production increased +0.7% in April, (+16.5% annualized) as manufacturers recover from the severe weather impacts in the south central region, and deal with the delays caused by the continuing chip shortages. Industrial production has now recovered 83.5% of the COVID decline.

Chart of the week

The Job Openings & Labor Turnover Survey (JOLTS) showed a record number of job openings (8.12 million) for the month, representing a gain of 7.8% over the prior month. The survey began reporting results on December 2000. These statistics confirm the supply of jobs isn’t the issue, its the demand for jobs (for a variety of reasons) that needs to catch up. I expect the demand to pick up as we progress through the year.

Summary: Regular readers know my biggest near term concern was not a deflationary double dip recession, but rather a “sugar high” economy that pushes cost of living expenses higher based on historic increases in the money supply. Here we are. In last weeks summary, I wondered out loud how the market would react to a CPI above 2%. The initial reaction wasn’t good, but the bond market actually took it in stride.

Much like last weeks disappointing jobs report, one month doesn’t make a trend. This months CPI was compared against the depths of the COVID shutdown, so we should expect it to be on the high side. The Fed believes this will be temporary. I wish I could tell how this will all play out. It would certainly make my life a lot easier. The truth is no one really knows.

The good news is earnings are so good that rates/inflation have a ways to go before they become a real threat to stock valuations. That doesn’t mean we can’t get a correction along the way. Those happen routinely even during the good times. Continue to expect above average economic growth, along with above average inflation, for the foreseeable future.

Next week we have 21 S&P 500 companies reporting earnings. I’ll be paying attention to Home Depot (HD) on Tuesday. For economic data, we have the Conference Board’s Leading Economic Index (LEI) on Thursday.

Weekly stock market & economy recap

S&P 500 earnings update

The earnings per share (EPS) for all S&P 500 companies combined increased to $189.96 this week. A gain of +1.3% for the week, and +19.5% year to date.

88% of S&P 500 companies have now reported Q1 results. 87.2% have beaten earnings estimates and results have come in +22.8% above expectations. (I/B/E/S data from Refinitiv)

2021 earnings growth is now +34% and rising.

The S&P 500 gained +1.23% for the week, another record high.

The EPS increased (+1.3%) slightly more than the index (+1.23%). The price to earnings (PE) ratio remains 22.3x.

The S&P 500 earnings yield is 4.5%, compared to the 10 year treasury rate (which declined to 1.57%), still heavily favors stocks in terms of valuation even at these record high prices. However, valuation isn’t a market timing tool. It’s just one piece of the puzzle.

Economic data review

The Institute of Supply Management (ISM) reported economic activity in the manufacturing sector grew for the 11 straight month. April results came in at 60.7, which was below last month (64.7), but still remains at historically high levels and well in expansion territory (reading above 50 signals expansion).

“The manufacturing economy continued expansion in April. Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

All 18 manufacturing industries reported growth in April. New orders, Production, and Employment continue growing, while 80% of respondents reported having to pay higher prices for materials, pushing the prices index to a 12+ year high.

The ISM Services sector index for April came in at 62.7, slightly below March (63.7) but still well in expansion territory. 17 out 18 services industries reported growth in April.

“There was slowing growth in the services sector in April; however, the rate of expansion is still strong. Respondents’ comments indicate that pent-up demand is continuing. Production-capacity constraints, material shortages, weather and challenges in logistics and human resources continue to affect deliveries, which has resulted in a reduction of inventories.”

Much like the Manufacturing report, all services industries are reporting higher costs for materials and service related expenses. The “Prices” sub-index increased at a faster pace in April, and is now at the highest level since July 2008. Inflation pressures are here and its only a matter of time before it shows up in the core CPI. The real question is whether it will be transitory.

My weighted ISM (which combines services and manufacturing readings based upon their overall weight in todays economy) came to 62.2 for April. If annualized, it represents real GDP growth of approximately 4.78%.

Monthly net jobs created in April came in at +266K, which was well below consensus estimates of +990K. March was revised down from +916K to +770K, and February was revised up from +468K to +536K. Net revisions for February and March was -78K lower than previously reported.

The cumulative jobs recovery now stands at a net 8,214,000 jobs lost since the February 2020 high. Well off the -22,362,000 net jobs lost that bottomed out in April 2020, but still has only recovered about 63% of the total jobs lost.

Notable earnings

Mobile payments provider Square Inc. (SQ) reported record results across the board. Adjusted EPS came in at $0.41, which was +141% above street expectations, and the fourth straight quarter where earnings surpassed expectations.

Total revenues came in at $5.05 billion, which was +51% above expectations, and a growth rate of 266% above Q1 2020 results.

Bitcoin revenues skew the results though. It’s basically a pass through item used to attract customers to the Cash App. Transaction based revenue grew 27%, subscription & services revenue grew 88%, hardware revenue grew 39%, while bitcoin revenue grew 1,047% and now makes up about 70% of Square’s total revenues. Excluding bitcoin revenues, Square’s revenue growth rate drops to +44%.

Gross profit margins on bitcoin revenues are only 2% – their profit is the spread between the buy and sell transactions. These results caused total gross profit margins to deteriorate from 37.7% in Q1 2020 to 19.1% in Q1 2021.

Operating income came in positive for the 3rd straight quarter – which is a company record – growing 85% from last quarter. Margins remained relatively similar from last quarter, at a modest 1.3%.

I’ll be the first to tell you its incredibly difficult to value a company like this. Very high growth but still hasn’t shown sustainable profitability. And now that bitcoin makes up 70% of the company’s revenues, valuation attempts become more difficult. I’ve owned a very small position for years, I think fintech is the future. The stock gained +250% last year alone, so a lot of good news is already priced in and I wouldn’t be surprised for this stock to consolidate those gains for awhile. I’d add to positions if price ever got into the $158-170 area, its a pretty good pure growth play, but I don’t have high conviction on this one long term.

Chart of the week

In light of this weeks disappointing jobs report, I thought it would be good to revisit the jobs recovery statistics from the prior recession. I know its a bad comparison, because these two recessions have completely different dynamics, but my point is that while the monthly net jobs gained/lost is an important data point, its seen as a lagging indicator.

The decline started in January 2008 and there would be 26 straight months of net job losses before bottoming out in February 2010. The S&P 500 bottomed out on March 2009, and would go on to basically double in value while net jobs lost continued for another 12 months. It would take 4 years to fully recover. Meanwhile the S&P 500 was already about 30% above the pre-crash highs, and more than tripled off the March 2009 lows.

It proves the point that if your waiting for the flowers to bloom and all the worries of the world to be solved, then your either going to miss out entirely or pay a premium price (buying high). It’s been one year since net jobs lost bottomed out, and we have recovered 63% of the losses. During the 2007-2014 recovery, it took roughly 2.5 years to get to that 63% recovery level.

One month doesn’t make a trend. I still expect strong jobs growth this year. And in this wacky environment we are in, bad news is technically good, since it means the Fed will probably remain accommodative for longer.

Summary: It was an interesting week. Treasury Secretary Yellen’s comments were taken out of context, but I think the inflation concerns are valid. The prices index is soaring for both Manufacturing and Services PMI’s, and even Warren Buffett recently commented about the “very substantial inflation” he is seeing in the businesses Berkshire owns. Regular readers know I’ve mentioned the historic growth in M2 money supply numerous times before.

Next week we get our latest update on consumer price inflation (CPI), and it will be interesting to see how the market reacts when the core CPI breaks 2.0%. I have no idea if this month will be the month, but I expect it to breach 2% at some point this year.

The good news is the S&P 500 earnings yield (and 30%+ growth rate) is so good right now that rates have room to run before they even get close to threatening stocks in terms of valuation. All we can do is take it one week at a time and go as the data leads. Earnings are phenomenal, the economy is solid, and valuation is still reasonable.

Next week we have 18 S&P 500 companies reporting earnings. For economic data we have the small business optimism report on Tuesday, CPI report on inflation on Wednesday, PPI on Thursday, Retail sales & industrial production on Friday.

Weekly stock market & economy recap

S&P 500 earnings update

The earnings per share (EPS) for all S&P 500 companies combined increased to $187.50 this week. A gain of +1.35% for the week, and +18% year to date.

60% of S&P 500 companies have now reported Q1 results. 87% of companies have beaten earnings expectations, and earnings have come in +22.8% above estimates. Q1 earnings growth is now +46.3%, and full year 2021 earnings growth projections have increased to +32.3%. Also 78% of companies have beaten revenue estimates. (I/B/E/S data from Refinitiv)

The S&P 500 gained +0.02% for the week.

The increase in the EPS (+1.35%) was more than the increase in price (+0.02%), making the valuation a bit more attractive. The price to earnings (PE) ratio is now 22.3.

The S&P 500 earnings yield is now 4.48% compared to the 10 year treasury bond rate – which increased to 1.63%. The equity risk premium is now 2.85%. Stocks are still reasonably valued compared to fixed income alternatives.

Economic data review

The Conference Board’s consumer confidence index came in at 121.7 for April. A gain of 11.7% over last month (which was revised down, from 109.7 to 109.0), and an increase of 42% year over year.

“Consumers’ assessment of current conditions improved significantly in April, suggesting the economic recovery strengthened further in early Q2. Consumers’ optimism about the short-term outlook held steady this month. Consumers were more upbeat about their income prospects, perhaps due to the improving job market and the recent round of stimulus checks. Short-term inflation expectations held steady in April, but remain elevated.”

Consumers appraisal of current conditions increased +27% for the month.

The consumer confidence index has now recovered 72% of the COVID decline, but remain 10.4% below all time highs.

We got our first look at Q1 GDP this week. Real GDP grew 6.4% on an annualized basis in Q1, now at $19.08 trillion. The economy has now recovered 91.5% of the COVID recession, and is likely to make a new record high in Q2.

“The increase in real GDP in the first quarter reflected increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending that were partly offset by decreases in private inventory investment and exports.”

Personal Consumption Expenditures (PCE) excluding food and energy costs (Core PCE) increased 0.4% in March, the highest monthly inflation increase since October 2009. Core PCE is now +1.8% annualized, but still below the Fed’s “averaging above 2%” target. Core PCE is considered the Fed’s preferred data point on inflation and therefore can have an impact on future monetary policy decisions.

Notable earnings

So many key earnings reports this week but not enough time to review them all. A lot of good candidates, but I chose Shopify (SHOP) because it was the biggest standout of the bunch. The company reported adjusted EPS of $2.01, which was +175% above street expectations and a growth rate of 958% above Q1 2020 results.

Revenues came in 15% above what the street was expecting, a growth rate of 110% over Q1 2020 results. Subscription solutions grew 71%, while merchant solutions grew 136.5%. Gross merchandise volume (GMV) grew 114%. Total revenues for the last twelve months (TTM) now stand at $3.92 billion.

The TTM revenue growth rate continues to increase and now stands at 88.4%, a record high for the company.

Gross margins improved to 56.5%. Operating costs as a percentage of total revenues also improved across the board (Sales & marketing costs decreased from 33% to 19%, research & development costs decreased from 25% to 18%, general & administrative costs decreased from 10% to 7%). It was the third straight quarter the company reported an operating profit (Q1 2021 operating margins of 12%), pushing the total operating profit reported over the last 12 months up to $209 million.

TTM operating margins hit an all time high of 5.3%.

In terms of forward guidance, the company expects further sales growth throughout 2021, but at a lower rate. And they expect operating expenses to increase throughout the year, and for 2021 operating income to be less than 2020.

It was a blowout quarter for the company, but the forward guidance might have taken a little of the shine off. The stock was up as much as 10% post earnings, but has given a good portion of those gains back in the days following. There is no problem with the operating results, but the current valuation (at 50x sales) is already priced near perfection after 2019 gains of 187% and 2020 gains of 185%.

The stock still trades above the 50 and 200 day moving average, but is showing some relative weakness. I maintain a small position in the company with no intentions to sell, but I also can’t bring myself to add at these prices. I’d add to positions if the price fell to the mid to high $800’s.

Chart of the week

173 S&P 500 companies reported Q1 results this week. The above chart shows the results of the 16 companies I own that reported this week. On average, earnings came in 36% above expectations, while revenues came in 5.7% above expectations. The average earnings growth was 133% and average revenue growth was 46.3%.

Summary: It was an all time great week for earnings results. You had $2 trillion dollar companies (in Apple and Amazon) report revenue growth of 54% and 44% respectively. This is unheard of. Not only did they report astonishing growth rates for such big companies, they reported results that far surpassed expectations. Facebook, Google, Apple, & Amazon beat earnings estimates between 40% to as high as 67% above expectations. It makes me wonder is this as good as it can possibly get?

Stock reactions were relatively modest considering the size of the beat. The Nasdaq actually closed slightly negative for the week. The S&P 500 has nearly doubled since the March 2020 lows, and many of these great companies had 3-5 years worth of stock price gains all in one year. No one can predict what the market will do in the short term. But the fundamentals are still supportive of risk assets.

Next week there is 144 S&P 500 companies reporting Q1 results. I’ll be paying special attention to GM, Paypal (PYPL), Twilio (TWLO), and Uber (UBER) on Wednesday, and Square on Thursday. For economic data we have ISM Manufacturing PMI on Monday, ISM Services PMI on Wednesday, and the employment report on Friday.

Weekly stock market & economy recap

S&P 500 earnings update

The earnings per share (EPS) for all S&P 500 companies combined increased +0.52% this week to $185.01. The forward EPS is now +16.34% year to date.

About 25% of S&P 500 companies have now reported Q1 results. 85.4% of those companies have beaten earnings estimates, and combined earnings have come in +22.9% above expectations. (I/B/E/S data from Refinitiv)

The S&P 500 index declined -0.13% this week.

The increase in the EPS (+0.52%) plus the decrease in price (-0.13%) for the week, pushed the price to earnings (PE) ratio down slightly to 22.6x

The earnings yield for the S&P 500 is 4.43% compared to the 10 year treasury rate of 1.56%. Just in terms of valuation, fixed income still offers little competition to stocks.

Economic data review

The Conference Board’s Leading Economic Indicators index (LEI) increased +1.3% in March (the highest monthly growth rate since August), while February’s number was revised lower from 110.5 to 110.2. All ten indicators within the index increased in March.

“The improvement in the U.S. LEI, with all ten components contributing positively, suggests economic momentum is increasing in the near term. The widespread gains among the leading indicators are supported by an accelerating vaccination campaign, gradual lifting of mobility restrictions, as well as current and expected fiscal stimulus. The recent trend in the U.S. LEI is consistent with the economy picking up in the coming months, and The Conference Board now projects year-over-year growth could reach 6.0 percent in 2021.”

The LEI is now about 0.50% away from making a new all time high.

March new home sales came in at 1,021,000, a gain of +20.7% for the month. Gains were pretty solid across all regions and February numbers were revised higher, from 775K to 896K. You have to go back to August 2006 to find a higher monthly number. New home sales have historically been a pretty reliable leading indicator, so a new cycle high for this expansion bodes well.

The March new home sales number is +66.8% higher than the prior years results. You’d have to go back to January 1992 to find a higher annual growth rate.

Notable earnings

Netflix (NFLX) reported Q1 results this week, with adjusted EPS coming in at $3.75, which was above estimates and +137% above last years results.

Revenues came in at $7.16 billion, a record high, and a growth rate of 24% year over year and 7.8% sequentially.

Operating income came in at $1.7 billion, an all time high, and operating margins jumped from 16.61% in Q1 2020, to 27.36% in Q1 2021. The margin expansion came from an increase in gross margins, from 37.6% to 46.0%, and reduced spending on marketing, from 8.7% of sales to 7.2%, along with minor improvements in tech & development and G&A spending as a percentage of total revenues. Part of the margin expansion has to do with delayed production costs due to COVID restrictions, but the margin improvements aren’t just a COVID phenomenon. The trailing twelve month (TTM) operating income trend has been moving sharply higher for the last few years now.

TTM Net profit margins now come in at 14.24%, an all time high. The company’s increasing profitability was noted, “we believe we are very close to being sustainably FCF positive and that we no longer have a need to raise external financing to fund our day-to-day operations.”

Now to the bad news. New subscriptions for Q1 came in at 4 million, which was well below the company’s guidance of 6 million, and the company guided Q2 net subscriptions of only 1 million, which would be one of the lowest quarters ever. It’s clear a lot of future growth was pulled forward last year, and increasing competition won’t help matters either.

Netflix’s income comes exclusively from streaming subscriptions, so it only has two choices to increase growth. 1) increase subscriber base, and/or 2) raise prices. It looks like subscriber growth will be limited for the foreseeable future, so that leaves price increases. But raising prices may only worsen the subscription growth situation.

Netflix does deserve inclusion to a portfolio IMO. It’s a fantastic company that’s becoming more profitable each day. But the tough year over year comparisons and competition in the streaming space makes me question the future growth rate, and therefore question the current valuation (current forward PE is 56x). I cut positions in half during the failed breakout attempt after reporting Q4 results in January.

The stock gapped down below its 200 day moving average after reporting earnings and remained below even during Friday’s rally. The relative weakness feels bearish. If the stock can’t stay above the 200 day, its likely to retest the bottom of this trading range around $460.

Were would I be looking to add back to full position? Around $440 would get me interested, there is a major swing high at $423, and it would match the 26% decline in March 2020. $390 would be the next area of interest, there is technical support there and would match the 35% decline in 2019. I have no idea if price will get that low. Otherwise I’ll maintain half size positions in the stock for the foreseeable future.

Chart of the week

This weeks chart is the updated world economic growth projections from the IMF. They now expect global growth of 6%, which would be a 50 year high. I think this will benefit those holding a diversified portfolio. In Q1 we saw market returns come from international, small cap, and value stocks, while large cap growth (tech) lagged behind as we adjust to the new normal.

Summary: 2021 earnings growth is currently projected to be +30% (highest since 2010) and rising, while companies are beating earnings expectations by a record amount. To put this in perspective, since 1994 the average earnings beat rate is about 65%, and results come in about 3.5% above expectations. The Q1 beat rate is currently 85% and results are coming in 23% above expectations. Valuation is still reasonable and the economy looks poised for record growth. So far the bond market seems to be taking the great economic data in stride, with interest rates remaining in negative territory when adjusting for inflation (real rates).

The market declined about 1% on Thursday when Biden’s capital gains tax increase proposal was announced. First off, as of right now its just a proposal. The slimmest majority in the Senate means this process is likely to result in a compromise of some sorts. Taxes are going up, the question is by how much. I suspect this is a negotiating tactic, start high and find a compromise somewhere in between. We’ll see.

I don’t see these proposals as changing the fundamental picture in any significant way, but it could have a short term affect on sentiment/valuation. If this is an area of concern for you, its time to assess your time horizon. If your time horizon is 5+ years, meaning its money you don’t need anytime soon, then this issue can be ignored.

Next week will be extremely busy. 173 companies (roughly one third of the S&P 500) will be reporting earnings, including all the big technology names. The list of earnings I’ll be paying attention to is too long to list. For economic data we have consumer confidence on Monday, FOMC statement on Wednesday, our first look at Q1 GDP on Thursday, and core PCE on Friday.

Weekly stock market & economy recap

S&P 500 earnings update

The earnings per share (EPS) for all S&P 500 companies combined increased to $184.05 this week, a gain of 0.4% for the week and +15.8% year to date.

8.8% of S&P 500 companies have reported Q1 results so far. 84% of those companies have beaten estimates, and results have come in a combined 30.8% above estimates. So far Q1 earnings growth is +31%. (I/B/E/S data from Refinitiv)

The S&P 500 increased +1.37% for the week, and is now +11.4% year to date – not including dividends.

The increase in the index (+1.37%) was greater than the increase in the EPS (+0.4%). Therefore the market got a little more expensive, as the price to earnings (PE) ratio increased to 22.7x. Investors are paying $22.70 for every $1 in S&P 500 earnings.

The S&P 500 earnings yield is currently 4.4%, compared to the 10 year treasury bond rate (which declined for the second straight week) at 1.57%. The equity risk premium (earnings yield minus treasury rate) increased to 2.82% this week. Despite another record high, stocks are still reasonably priced based upon fixed income alternatives and earnings growth.

Economic data review

The NFIB small business optimism index for March came in at 98.2. An increase of 2.5% for the month, and 1.9% annualized. 7 of the 10 index components came in stronger than last month, led by the % of owners expecting the economy to improve & expected increase in sales. The NFIB began reporting the data on a monthly basis in 1986, and the historical average for the index is now 98.4.

“Quality of labor” was cited as the single most important problem for small business owners (with taxes and regulations as close runner-ups). “Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force. However, owners remain determined to hire workers and grow their business.”

The Consumer Price Index (CPI) increased 0.6% in March, the highest monthly increase since June 2009. The CPI is now +2.6% on an annual basis (up from +1.7% annualized last month). The biggest contributing factor was the large increase in gasoline and fuel oil costs.

The Consumer Price Index (CPI) minus food and energy (Core CPI) increased 0.3% in March. Core CPI is now +1.6% on an annual basis (up from +1.3% annualized last month). Core inflation readings are the Fed’s preferred method of monitoring inflation. Though inflation is moving higher, as expected, its still short of the Fed’s goal of +2% annualized.

Total retail sales for March came in at $619 billion, an increase of +9.8% above last month (which was also revised higher), and another all time high. Total retail sales are now +17% above the pre-COVID highs and +50% above the April 2020 lows. The gains were broad based across all industry sectors, with every industry reporting gains above last month.

Total retail sales are +27.7% higher than they were at this point last year. This is by far the highest annualized growth rate since the dataset began in 1993. Stellar results no matter which way you look at it.

Industrial production increased +1.4% in March (+1.0% gain year over year), led by gains in construction and mining. For Q1, total industrial production increased +2.5% annualized. Industrial production has now recovered 80% of the pre-COVID decline, but still 3.4% below February 2020 levels.

Notable earnings

Taiwan Semiconductors (TSM) reported Q1 adjusted EPS of $0.95, slightly above expectations, and 27% above Q1 2020 results.

Revenues grew 25.3% above Q1 2020 results, and 1.9% sequentially. Trailing twelve month (TTM) revenues are now $50.8 billion, a record high for the company. TSM guided Q2 revenue growth between 24% to 26.8%, and full year 2021 revenue growth of 20%.

Gross margins and operating margins improved from Q1 2020 results, coming in at 52.4% and 41.5% respectively. Operating income grew 25.7% for the quarter, and trailing twelve month (TTM) operating income now stands at $20.4 billion, another record high.

The company announced capital expenditures (CAPEX) for 2021 will likely come in higher than expected, around $30 billion. And that supply constraints may not go away until 2023. Also seasonal decline in smartphone related chip sales will partly offset strength in “high performance computing” chips.

If we look at the recent price pattern, we can see the current decline bottomed out at $107.89, which matches the -24% decline that occurred during the price consolidation of 2018-2019.

The stock bounced from $107 to $127, but is having trouble staying above its 50 day moving average. The company raised forward revenue guidance, but increased guidance on expenses by an even greater amount, which may be a reason why the stock is exhibiting weakness. As long as price can’t retake the 50 day moving average, the downside momentum puts the prior low at $107 back in play. If $107 fails to hold, then I’d expect price to drop in the vicinity of $100 (which would match the -29.5% decline in March 2020 and coincides with the 200 day moving average). I would be adding to my positions should that happen. I believe in the company long term.

The rumored Samsung production problems may only serve to increase TSM’s already strong competitive advantages, at around 60% market share according to Gartner. That being said, the stock does carry additional risks associated with international investing (currency, political, etc.).

Chart(s) of the week

Some good signs on the labor front. In the NFIB small business optimism report this week, 22% of firms said they plan on increasing employment in the next 3 months, and 42% of owners reported job openings they were unable to fill (a record high). The chart above shows the total job openings from the JOLTS report last week is only 2.7% below all time highs.

Despite being down more than 8 million net jobs below the pre-COVID highs, the jobs recovery looks like its going to gain momentum in the coming months. Interesting to hear in the NFIB report that government stimulus programs are actually creating an incentive not to return to work in some cases. I’ve always said the best stimulus would be to reopen this economy back up again, so people can get back to work. It’s long overdue and it doesn’t come with trillion dollar price tags.

During the pandemic, banks had to set aside hundreds of billions in loan loss reserves in anticipation of defaults. This was a direct hit to earnings. Earnings for the entire financial sector fell -38% in Q1 2020, and -47% in Q2 2020.

This week, many of the largest banks reported Q1 results that showed significant earnings growth. Much of this had to do with the release of those loan loss reserves, now that confidence is coming back, that were added back to earnings. Total corporate profits for the financial sector could hit an all time high this quarter.

Why is this important? The Fed suspended financial companies from buying back shares and dividend distributions were capped as well. Now that fears are subsiding, we should expect a gradual reversal of those restrictions. Even if you don’t own these individual bank stocks directly, chances are you are indirectly invested via mutual funds/ETF’s. Financials make up about 15% of the S&P 500 index and about 22% of the large cap value index as well.

Summary: As the pandemic took hold, earnings projections were reduced dramatically. As a result, reported earnings have been beating expectations by record amounts over the last 3 quarters. At some point the pendulum will swing too far in the other direction, where earnings projections get too optimistic. But it doesn’t appear that threat is coming anytime soon, as the Q1 beat rate is currently above 80% so far.

Much time has been wasted trying to anticipate the Federal Reserve’s next move. Let me save you the time, the Fed will not be raising rates anytime soon. The Fed’s current dual mandate calls for a jobs recovery and price stability (inflation). We are still 8.4 million net jobs below the pre-COVID highs, meaning even if the economy gained 1 million net jobs every month, we wouldn’t reach the pre-COVID highs until next year. The second part of the dual mandate calls for inflation averaging above 2% for some time. This month’s core CPI reading shows inflation still hasn’t got above 2% yet.

Where it gets tricky would occur if only one mandate is met. What if inflation gets too high, while employment hasn’t fully recovered? Regular readers know I believe that’s a realistic possibility somewhere down the road. But still, let’s let it show up in the data first. No need to worry about something that may never occur. Regular readers also know I’m data dependent. My outlook is always based upon actual data as opposed to subjective opinions. I go as the data leads me. No need to make this more complicated than it needs to be.

Next week Q1 earnings season really gets going, with 82 S&P 500 companies reporting. I’ll be paying attention to Netflix (NFLX) on Tuesday, Lam Research (LRCX) on Wednesday, and DR Horton (DHI) on Thursday. For economic data we have the Conference Board’s leading economic indicators index on Thursday, and New Home sales on Friday.