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Key Points for the Week

  • S&P 500 earnings are expected to grow more than 30% because companies are beating earnings estimates by a wide margin. Revenue growth is also well ahead of expectations.
  • Improved retail sales aren’t just taking place in the U.S. Last month, loosened COVID restrictions and increased use of online shopping pushed retail sales up 5.4% in the United Kingdom.
  • Housing prices continue to trend higher. The median price of existing homes rose 17.2% from last year as builders wrestle with shortages in land, labor and materials.

Last week, as investors weighed the news, strong corporate earnings were offset by higher grocery prices and rising numbers of global coronavirus cases.

Solid corporate earnings weighed favorably on the markets.

So far, 25 percent of the companies in the Standard & Poor’s (S&P) 500 Index have reported first quarter earnings, and 84 percent said profits grew faster than expected, reported John Butters of FactSet. The blended earnings growth rate for the S&P 500 (which includes estimated earnings for companies that have not yet reported and actual earnings for companies that have) was 33.8 percent last week. For context, the 5-year average earnings growth rate (actual earnings) for the S&P 500 was 6.9 percent as of last week.

It’s important to remember the impact of earnings is often muted as earnings expectations – good or bad – tend to be priced into the market long before they are reported.

Inflation expectations weighed unfavorably.

Investors remain concerned about inflation – and so are consumers. While the Federal Reserve and many economists believe we’ll see a fleeting uptick in inflation, others think the increase will persist. “…A consistent drumbeat of price hikes from major companies, consumer reports, and market data suggest the world may not be going along with their conclusion,” reported Dion Rabouin of Axios.

It is likely markets may pay particularly close attention to Federal Reserve statements about inflation and interest rates this week and over the next several months.

Rising numbers of Covid-19 cases around the world tipped the scales.

Concerns about India’s coronavirus surge, Japan’s state of emergency, and rising numbers of cases around the world caused investors to reassess expectations and some sold shares of companies that were expected to benefit from the re-opening of world economies. Yun Li and Maggie Fitzgerald of CNBC reported:

“The sell-off in shares that are tied to a successful reopening came as the World Health Organization warned that global coronavirus infections were edging toward their highest level in the pandemic. In the United States, while the country is maintaining a pace of 3 million reported vaccinations per day, about 67,100 daily new infections are still being recorded.”

Despite uncertainties, most (67 percent) professional investors who participated in Barron’s Big Money Poll said they were bullish on the outlook for stocks in the next 12 months. Just 7 percent were bearish.

Major U.S. stock indices finished the week flat or slightly lower. U.S. Treasuries rallied briefly before finishing the week flat.

This Week in the Markets

S&P 500 earnings are exceeding elevated expectations. Before earnings season began, S&P 500 earnings were expected to grow 23.6% as businesses rallied from lower earnings during the COVID shutdowns from one year ago. Based on the first quarter of companies reporting, earnings are now expected to grow more than 33.8%, and revenue is now expected to rise 7.5%.

Consumers taking advantage of increased freedom to buy goods isn’t limited to the U.S. U.K. retail sales gained 5.4% compared to last month. Gains in online sales and the home improvement sector supported the growth.

U.S housing markets continue to rally as existing home prices rose 17.2% from last year. Lumber prices have gained more than 300% since the pandemic began as Americans look to increase the comfort of their homes by remodeling or moving to larger homes further removed from city centers.

This week, the government reports first quarter GDP as well as inflation and consumption data through the first quarter. The Federal Reserve also meets as investors start to look for clues on how the Fed will approach interest rates and short-term spikes in inflation.

Building a Bubble?

Is the housing market in a bubble? It turns out this question is on many people’s minds. In the past month the number of Google searches asking “When is the housing market going to crash?” rose 2,450%. Why do some investors believe the housing market might be forming a bubble? The biggest reasons are prices have increased significantly and houses are selling quickly.

The median price of an existing sold home reached $329,000 recently, the highest on record and a 17.2% rise from March of last year. Prices for the key inputs to building a new home have also moved higher. Prices for land, labor and lumber (and other materials) have moved significantly higher. Lumber prices have increased 300% since the pandemic began and have added $24,000 to the average price of a new home.

Houses are flying off the market. The average time to sell is 18 days, and half of homes sell in a week, often at prices above the listing price. Competition for houses is fierce because of a lack of supply. Existing home sales have dropped from above 6.5 million per month to just above 6 million. There are 28% fewer homes for sale compared to last year. Based on purchase rates, that is only 2.1 months’ supply. New homes show similar dynamics. Single-family home starts rose 15.3% in just one month. Inventory only covers 3.6 months of demand.

The evidence warrants further attention to the housing market. Rather than a bubble, a number of factors have pushed housing prices up. COVID has forced a reassessment of living arrangements for many while reducing the number of people willing to sell their homes. Who wants to invite a hundred strangers over to traipse through your home during a pandemic? COVID has also made the risks of moving to a retirement community or a nursing home higher. Foreclosures have slowed as government programs have made it easier to stay in your house while stimulus checks help pay the mortgage.

The limited supply is meeting strong demand. Many are anxious to get out of cities. Low interest rates plus a pandemic make having a second home more attractive. Stimulus checks boosted remodeling efforts as other large-expense items, like vacations, were inhibited by COVID. Remodeling existing homes drives up the price of lumber as more families add extra space for a playroom or home office.

Tougher mortgage standards are another reason a bubble seems less likely. Unlike during the housing bubble, banks have held to tougher lending standards, meaning more homeowners should be able to pay their mortgage off over time.

Rather than forming a bubble, it is likely prices have adjusted rapidly to reflect the new market environment. The great thing about markets is participants don’t stand still. Some demand will respond to higher prices and delay moving. New home construction will likely pick up, and additional mobility will slow the remodeling pace. Building materials will become more readily available as markets adjust to the higher demand.

SECURE Act

When the SECURE Act was passed into law in early 2020, there were many substantial updates that affected retirement account rules that had previously been in place for years. One of the more substantial changes was the elimination of the stretch IRA for non-eligible beneficiaries. This new rule requires that most non-spousal beneficiaries of retirement accounts after January 1, 2020 must distribute the entire inherited account within 10 years of the account owner passing away. Prior to this change, beneficiaries of retirement accounts could use their own life expectancy to take distributions from the inherited account. This new 10-year rule could potentially push beneficiaries into a higher tax bracket and may require account holders and beneficiaries to review their current estate plans.

Another change in the SECURE Act was that individuals can wait until they reach the age of 72 before taking required minimum distributions. Before the SECURE Act was passed, individuals with retirement accounts were required to take distributions no later than April 1st of the year they turned 70 ½. This new age limit does not apply to individuals who turned 70 ½ before 2019.

If you have any questions about the SECURE Act and how it might affect your financial planning goals, please contact us.

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.

Be Aware of New Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

April 29, 2004: World War II Monument Opens in Washington, D.C.

On April 29, 2004, the World War II Memorial opened in Washington, D.C. to thousands of visitors, providing overdue recognition for the 16 million U.S. men and women who served in the war. The memorial is located on 7.4 acres on the former site of the Rainbow Pool at the National Mall between the Washington Monument and the Lincoln Memorial. The Capitol dome is seen to the east, and Arlington Cemetery is just across the Potomac River to the west.

Though the federal government donated $16 million to the memorial fund, it took more than $164 million in private donations to get it built. Former Kansas Sen. Bob Dole, who was severely wounded in the war, and actor Tom Hanks were among its most vocal supporters. Only a fraction of the 16 million Americans who served in the war would ever see it. Four million World War II veterans were living at the time, with more than 1,100 dying every day, according to government records.

The memorial was inspired by Roger Durbin of Berkey, Ohio, who served under Gen. George S. Patton. At a fish fry near Toledo in February 1987, he asked U.S. Rep. Marcy Kaptur why there was no memorial on the Mall to honor World War II veterans. Kaptur, a Democrat from Ohio, soon introduced legislation to build one, starting a process that would stumble along through 17 years of legislative, legal and artistic entanglements. Durbin died of pancreatic cancer in 2000.

The monument was formally dedicated May 29, 2004, by U.S. President George W. Bush.

Weekly Focus

The quickest way to double your money is to fold it over and put it back in your pocket.

Will Rogers, American Stage and Film Actor

Share prices fluctuate more than share values.

Sir John Templeton, Investor, Banker, and Asset Manager