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Key Points for the Week

  • Government stimulus programs and reopening efforts helped U.S. GDP grow an annualized 6.4% in the first quarter.
  • S&P 500 earnings are expected to grow 45.8%. Strong results from large technology, communication services and consumer discretionary companies pushed estimates significantly higher.
  • The Federal Reserve reiterated its commitment to low interest rates and suggested improved supply was a key to leveling out the recent surge in housing prices.

Happy Mother’s Day

To all mothers, we wish you a very Happy Mother’s Day this weekend and thank you for all of the love, sacrifice, and care that you have given us.

Weekly Summary

Last week, the Bureau of Economic Analysis reported the U.S. economy grew at a 6.4 percent annualized rate for the first three months of 2021. While that’s good news for companies and workers, asset managers are checking their expectations.

The stock market reflects what investors think may happen in the future. During the past year, major U.S. stock indices moved higher as investors anticipated vaccines and economic recovery, reported Patti Domm of CNBC. Since its March 2020 low, the Standard & Poor’s 500 Index has gained 88 percent.

Amidst strong signs of recovery in the United States, some asset managers are positioning for “inflation and tapering,” according to a source cited by Naomi Rovnick of Financial Times. “Investors have topped up their cash holdings at the fastest rate since March 2020 as debate intensifies over whether stock markets will continue rallying now the U.S. economic recovery from the pandemic is firmly under way.”

Investors were feeling cautious last week, but there were no signs of tapering, which occurs when the Federal Reserve begins to buy fewer bonds. On Wednesday, the Fed left its supportive policies in place.

When the Fed begins to change course and rates move higher, equity market valuations may adjust. “The main worry for stocks is that higher bond yields translate into lower equity valuations. Higher yields reduce the current value of future profits and therefore can reduce earnings multiples,” reported Jacob Sonenshine of Barron’s.

Profits were strong during the first quarter of 2021. U.S. companies continued to report exceptional earnings last week. With 60 percent of firms in the Standard & Poor’s 500 Index reporting, the blended earnings growth rate was 45.8 percent. More than 8 of 10 companies have reported better than expected earnings, reported John Butters of FactSet.

Major U.S. stock indices finished the week flat to down. Rates on 10-year Treasuries edged higher.

This Week in the Markets

U.S. GDP surged an annualized 6.4% in the first quarter. Two rounds of government stimulus helped the economy climb within 0.9% of its all-time high. If expected growth is included, the economy remains 3.7% below pre-COVID trends. Personal income jumped 21.1% from February as a second round of stimulus checks pushed money out to most Americans. Spending increased as well, but not as much as income. Personal consumption rose 4.2%, and services consumption, hindered by COVID concerns, rose only 2.2%.

The Federal Reserve left rates unchanged and signaled they will likely remain low. Core inflation rose 0.4% last month but remains below the 2% annual target. Inflation is expected to temporarily surge for a couple months because annual calculations are dropping price declines from the early stages of the pandemic.

S&P earnings reports last week pushed expected first quarter earnings much higher. Earnings are now expected to grow 45.8%, compared to 33.8% last week. But markets had evidently already anticipated the news. The S&P 500 was functionally unchanged. The global MSCI ACWI and Bloomberg BarCap Aggregate Bond Index both dipped slightly.

The big news this week will be the April employment report. Based on surveys taken in mid-April, the report will provide evidence of whether the stimulus and reopening measures are putting people back to work.

Meeting Elevated Expectations

The economic recovery, that started last year, is continuing at a rapid pace. The economic and earnings data reflected the power of stimulus, the importance of reopening, and the efficiency of corporations. All three areas support our view the U.S. economy is well on the road to recovery.

U.S. GDP surged 6.4% in the first quarter. The U.S. annualizes its GDP data, basically assuming the growth rate in the last quarter will continue for a full year. This means a 1.6% actual gain becomes a 6.4% increase in the report.

GDP growth primarily came from consumption, which increased at an annualized 7.0%. Much of the money for the increased spending came from government stimulus programs. A significant portion of aid from the $900 billion stimulus package signed by President Trump arrived in January, and President Biden signed a $1.9 trillion package in March. Sending out checks has proven to be a quick way to get money into people’s accounts and out into the economy.

The importance of reopening was also reflected in the data. March data shows services consumption rose 2.2%, and goods consumption rose 8.1%. Both data points were aided by the additional stimulus. Even though many more people were vaccinated, the growth in services isn’t keeping pace with goods consumption. We expect these numbers to move much closer together as more people are vaccinated.

The nature of stimulus checks likely promotes higher goods spending. Getting $1,400 per person creates an opportunity to make a large purchase, and goods are often more expensive. A reasonable expectation is for the vaccine to boost employment and reopening, causing last month’s 1% gains in employment income to continue and create a services recovery. Goods spending growth will likely slow unless even more stimulus checks are sent out.

Corporate efficiency was also on display last week. Around 30% of the S&P 500 reported earnings, and the results were phenomenal. Earnings growth expectations for the S&P 500 jumped from 33.8% to 45.8% in just one week. Gains from giants in technology, communication services, and consumer discretionary fueled the powerful earnings growth. The gains are primarily driven by companies beating estimated earnings by 22.8%. Normally companies beat analyst estimates by 6.9% on average.

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.

Estimates Suggest There Will Be 25 Million by 2100

Take a guess: electric vehicles, household robots, wild elephants, centenarians, or streaming services per household?

  • Electric vehicles. There may be far more than 25 million – estimates suggest 145 million – on the road by 2030.
  • Household robots. Domestic robots that offer companionship or help with tasks like lawn mowing, vacuuming, and mopping are becoming popular. Estimates suggest about 55 million domestic robots will be sold next year.
  • Wild elephants. From 1989 to 2018, the number of elephants in the wild doubled to 34,000, reported Earth.org.
  • Streaming services per household. Currently, the average number of streaming services per household is four. There’s room for growth, but probably not that much.
  • Centenarians. The world is in the midst of a longevity revolution and, by 2100, there may be as many as 25 million centenarians – people age 100 or older – around the globe, according to a source cited by Science Direct.

The world’s 65 and older population is growing rapidly.

According to the most recent population estimates from the United Nations, “…1 in 6 people in the world will be over the age 65 by 2050, up from 1 in 11 in 2019. The latest projections also show the number of people aged 80 or over will triple in the next 30 years. In many regions, the population aged 65 will double by 2050, while global life expectancy beyond 65 will increase by 19 years.”

Longevity deserves more thought than it often receives. It is an essential part of every financial and retirement plan, influencing savings goals, investment choices, and retirement income levels. Yet, people often underestimate their potential longevity.

In the United States, the average life expectancy at age 65 is 19 years, according to the Centers for Disease Control (CDC). Consequently, many people assume they should plan to live to age 84. However, the CDC estimate is an average. Half of 65-year-olds will live beyond age 84.

When it comes to planning for the future, having above average expectations for longevity may be a good idea.

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

May 5, 1961: Alan Shephard Becomes the First American in Space

On May 5, 1961, Navy Commander Alan Bartlett Shepard Jr. was launched into space aboard the Freedom 7 space capsule, becoming the first American astronaut to travel into space. The suborbital flight, which lasted 15 minutes and reached a height of 116 miles into the atmosphere, was a major triumph for the National Aeronautics and Space Administration (NASA).

NASA was established in 1958 to keep U.S. space efforts abreast of recent Soviet achievements, such as the launching of the world’s first artificial satellite, Sputnik 1, in 1957. In the late 1950s and early 1960s, the two superpowers raced to become the first country to put a man in space and return him to Earth. On April 12, 1961, the Soviet space program won the race when cosmonaut Yuri Gagarin was launched into space, put in orbit around the planet, and safely returned to Earth. One month later, Shepard’s suborbital flight restored faith in the U.S. space program.

NASA continued to trail the Soviets closely until the late 1960s and the successes of the Apollo lunar program. In July 1969, the Americans took a giant leap forward with Apollo 11, a three-stage spacecraft that took U.S. astronauts to the surface of the moon and returned them to Earth. On February 5, 1971, Alan Shepard, the first American in space, became the fifth astronaut to walk on the moon as part of the Apollo 14 lunar landing mission.

Weekly Focus

So many things are possible just as long as you don’t know they’re impossible.

Norton Juster, American Academic, Architect, and Writer

Patience is bitter, but its fruits are sweet.

Jean-Jacques Rousseau, Genevan Philosopher, Writer, and Composer