The close of the first quarter of 2021 brought new milestones for the markets. On the very first trading day of the second quarter, the S&P 500 crossed 4,000 for the first time and closed at 4,019. This new record came after Wednesday’s bounce in tech stocks which seesawed from the highs in early February when the U.S. 10-Year Treasury note began to rise on expectations of a strong recovery based on increasing economic indicator estimates. In addition to the record highs for the S&P 500, developments came in the form of an accelerated COVID-19 vaccine roll out and a decrease in case counts from the highs in early January through the first quarter. Thus, resulting in COVID-19 restrictions easing further across the U.S. This is good news for stimulus check recipients who now have more options to use that money in other areas outside the markets.
Unlike when previous stimulus checks were issued, retail investors appear to not be directing that excess cash into stocks. According to data from VandaTrack, during the first two stimulus check rollouts in April 2020 and December 2020, there was a noticeable jump in daily stock purchases within two weeks after checks were received. However, with the latest stimulus checks issued in March, there has not been as evident a jump in stock purchases. The chart below depicts the jump in investing activity based on daily trading volume averaged over a rolling ten-day period. It appears that the easing of COVID restrictions has would-be retail investors thinking of other areas to spend that extra cash. If retail investors are steering their money away, what is driving the continued growth in equity markets?
At the start of the year, estimates for economic growth were pretty tame. The estimated GDP growth rate for the U.S. in the first quarter of 2021 was 2.7% which is substantially different than the 4.8% GDP growth rate estimate at the start of the second quarter. Full-year 2021 GDP growth estimates were also revised to the upside from forecasts of 4.0% GDP growth at the beginning of the year compared to the 5.7% growth rate today. This increase in growth has translated to an upwards revision in earning per share (EPS) estimates for both the first quarter and full year. EPS estimates give guidance on how profitable a company is likely to be in terms of its net profit or bottom line in relation to the amount of its shares trading in the market. As a whole, Q1 EPS estimates for all companies in the S&P 500 increased by 6.0% to $39.86 from $37.61 during the first three months of the year. One reason for this increase is that analysts were overly pessimistic with their EPS estimates because of the COVID-19 pandemic lockdowns. Much of 2020 saw analysts making downward revisions to their original EPS estimates. However, that trend turned around starting in the last quarter of 2020 and into the first quarter of 2021.
Just as economists have been more optimistic about the recovery from the pandemic, companies in the S&P 500 have been much more optimistic in their EPS guidance. New economic data, such as Friday’s labor report, and today’s reaction to that news resulting in gains in all three major indexes follow this increasing optimism. Additionally, the Federal Reserve’s affirmation to keep interest rates near zero and the White House’s announcement of infrastructure spending in the trillions looks to have the economy headed for a solid recovery. At this point, it would not be surprising to see more upward revisions in EPS estimates for the second quarter of 2021. As we move into the second quarter, we remind investors to keep a long-term view and resist making sudden changes based on headline news. It is often time in the market that matters, and the longer you’re willing to hold, the less likely it is that losses will be recognized.
– Jose Rendon