Investors were bolstered by the Fed’s message this week. Low interest rates and monetary stimulus will remain pillars of the nation’s economic recovery for as long as it takes. Investors were comforted, but not enough to materially move stocks higher.
It was indicative that despite bullish news on a variety of fronts, investors ignored the good and focused on the negatives. First quarter earnings results, for example, have been better than good, but not enough to satisfy the bulls. Apple smashed earnings estimates, sending its stock price higher in after-hours trade, but the next day it finished down. It has been the same story for many of the market’s winners. What this tells me is that a lot of the good news in the market and in individual stocks may already be priced in.
Turning to the pandemic, the words we have all been waiting for “we have turned the corner,” were spoken this week by President Biden in his first address to Congress. That should have sent markets shooting up, and it did for a moment or two. But investors choose instead to fret about the skyrocketing coronavirus cases in Brazil and India and what damage that might do to global trade.
On the economic front, this week’s unemployment claims reached another pandemic-era low (553,000 claims), while first quarter GDP came in at a robust 6.4%. Many economists believe the numbers are going to get even better from here. The data was greeted with a mild yawn and little response other than to push the yield on the U.S. Ten-Year Treasury bond higher.
In the background, investors are keeping an eye on what most on Wall Street are calling President Biden’s progressive agenda. The price tag on all this intended government spending (if passed) now totals in excess of $6 trillion. In order to pay for it, the president is seeking to raise the corporate tax rate, plus increase the income tax rate on the top 1% of taxpayers. In addition, the capital gains tax for millionaires would practically double in order to equalize the taxes on investment income and the tax rate for ordinary income. In another blow to the wealthy, the president would get rid of the so-called step-up in basis at death for any gains of more than $1 million.
Higher taxes are almost never good news for financial markets and might provide some of the concern that seems to have soured investors’ moods. The fact that most Americans would not be hurt by Biden’s tax increases may be tempering the potential damage of these tax initiatives as there is the plan itself.
If passed, investors know there could be an awful lot of fiscal stimulus on the way. Some economists are now comparing President Biden’s plan to FDR’s social programs during the Depression. If that were the case, a look at history would indicate a great leap forward in economic growth.
The three major indexes responded to all this good news, making new highs as the week progressed, but the bulls just couldn’t keep up the pace. There was an increasing churn to the markets with individual stocks getting clobbered, despite favorable news across the board.
This is usually a precursor to some further consolidation that may be in store for us. An increasing number of Wall Street strategists have been sounding the alarm, predicting a 5-10% pullback at any time. Of course, several of them have been saying that for weeks or months and it has not occurred.
My own guess is that we spend the next few days digesting more earnings results, and then take a run at 4,240-4,280 level on the S&P 500 Index. At that point, let’s see where we are. If there isn’t still enough steam to move higher, than the ‘sell in May and go away’ advice we hear every year might be in the cards. And May is only a day away.