Report (Premium Edition) 03-29-2021

Introduction (Quick Overview)

The markets are likely to remain choppy as investors have to weigh the myriad dynamics impacting bonds and stocks. Positioning and portfolio rebalancing into month- and quarter-end should continue to be a major factor given the big swings this quarter.

Bull Driver For Equities: There are also billions of dollars in stimulus money (Deutsche Bank projects about $170 bln) likely to flow into stocks. However recent surveys have indicated Americans are not going to spend the money. A recent survey of 1090 by Refinitiv indicates that eight in 10 (80%) of Americans plan to mainly put their stimulus checks into either savings (48%) or pay down debt (32%). Of the remaining Americans, only one in five (20%) plan to mainly do otherwise by either spending (15%) or investing (5%) the amount they receive.

Bear Driver For Equities: The FT cited BofA research estimating U.S. private pension funds alone will have to rotate about $88 bln out of equities and into bonds, which was “historically significant” compared to the last three years. Also, JPMorgan estimates balanced/target-date mutual funds are primed to sell $136 bln of equities to buy fixed-income assets. Meanwhile, the varying degrees of virus cases and vaccine distribution continue to keep the markets on edge.

Junk Bond/High Yield Disaster: The junk bond/high yield market is now larger than the mortgage securities of 2008. If the 10 Year and/or economy starts drops, we could be looking at another depression.

Bottomline – Stagflation: Investors need to watch the 10-Year for increases and the flow of money. Money could flow out of equities at a rapid rate if the 10-Year goes above 1.75% because it would be greater than S&P 500 dividends. If this is followed by a slowing or drop in the economy, junk bonds would likely see huge losses and become worse as companies default. We would likely move into Stagflation where the economy would be low and have high inflation similar to the 1970s.

The data calendar is full today. February personal income and consumption highlight. We expect income to fall -7.5% after rising 10.0% in January, and spending to dip -0.2% from the prior 2.4% increase. The February advance goods trade report should show the deficit narrowing slightly to -$83.6 bln from -$84.6 bln. Both imports and exports are seen rising slightly.

Advance February wholesale and retail inventories are on tap as well. The final University of Michigan consumer sentiment index is penciled in at 83.0, unchanged from the preliminary reading. There are no larger-cap earnings reports on tap. Supply is also out of the way for now. That, and month- and quarter-end flows may support Treasuries, while profit-taking and rotation out of stocks could weigh on Wall Street.

Key Drivers for the Week of March 29

TIP – This is a 1 minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

• Vaccines, monetary and fiscal policy support boost optimism on recovery
• Day-to-day progress choppy due to virus waves, problematic vax rollouts, restrictions
• Easter holiday closures Friday through Monday in Europe
• Wall Street closed Good Friday, Treasuries have half-day session
• U.S. attention turns to jobs report, ISM, including wage and price data
• Fedspeak from Waller, Quarles, Williams, Harker, and Bostic     
• Canada releases GDP, industrial product prices, building permits 
• Japan unemployment, retail sales, production, housing starts, Tankan, PMI, auto sales 
• China reports PMIs; Australia retail sales, trade, building approvals slated
• Covid restrictions in parts of Europe over Easter, relaxed reopenings expected after
• Europe ESI Economic Confidence, HICP; German jobless, HICP, retail sales slated
• UK BoE lending and money supply, third Q4 GDP report, final March PMI due 

Key Market Trends

Tip: Use this as a quick guide on the short-term direction of key markets. I once had a client that would call me nearly every day asking the direction of the markets. This is a quick cheat sheet to know the trend and help understand what is happening with the markets.

S&P 500 Sectors

Tip: Use this section to know the performance of various sectors, weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have out-performed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

REIT Alert: Due to Covid-19, there is a large percentage of people that have not paid rent or mortgages. We are very worried about the effect it could have on real estate investment trusts’ (REITS) value. Even though the sectors may trending bullish, we believe that REITs could have a significant drop in value.

Week Ahead: Outlooks Brighten, Risks Remain

On March 29, 2021

The markets are growing increasingly confident in the bigger picture recovery scenario, supported by ongoing ultra-accommodative central bank policies, massive government stimulus programs, and vaccine developments. But the day-to-day progress remains choppy due to variance in vaccine rollouts globally, ongoing waves of virus infections complicated by new variants, and uncertainty over the staying power of stimulus-driven growth. Meanwhile, inflation remains very much on the markets’ mind, as supply chain difficulties, the extent of the pent-up demand likely to be unleashed as economies reopen, and base effects complicate the outlook. Hence, economic data remain crucial, and the coming week provides timely reports from the U.S., EU and Asia. In the U.S., March employment is in the spotlight, with total jobs and wage growth focal points. In Europe, another round of confidence data will detail the progress of the manufacturing and service sectors, including price dynamics. Lockdowns and vaccination developments will also be closely tracked. In Asia, China’s manufacturing PMIs will be scrutinized, while Japan offers its usual heavy month-end data package.

NORTH AMERICA

In the U.S., two reports should capture the lion’s share of attention — employment and ISM manufacturing. Note that the Wall Street will be closed Friday for Good Friday, while the bond market will be open for a shortened session to accommodate the jobs report. A 500k increase in March nonfarm payrolls (Friday) is anticipated after gains of 379k in February and the 166k rise in January. A rise in line with out forecast would be the highest since October. The jobless rate should tick down to 6.1% from 6.2% in February, and 6.3% in January. Average hourly earnings are assumed to tick just 0.1% firmer in March. The annual (y/y) wage gain should ease to 4.5% from 5.3% due mostly to an easier comparison, which could offer some mild solace to inflation concerns. Hours-worked are assumed to rebound 1.0% after a -0.5% February dip, with the workweek rising to 34.8 from a weather-depressed 34.6 in February. Broadly, the payroll rebound should gain steam in 2021 following the winter lull, thanks to stimulus deposits and vaccines.

The ISM manufacturing PMI (Thursday) is expected to dip to a still strong 60.0 in March from a 2-year high of 60.8 in February. Producer sentiment has remained firm into 2021 as businesses scramble to rebuild inventories, with an added lift into March from expanding vaccine availability and two rounds of stimulus distributions in January and March. Keep a close eye on prices paid, which climbed to a 13-year high of 86.0 in February from 82.1 in January. Surging demand and bottlenecks should add to price pressures, which in turn will likely add to inflation worries.

A modest amount of Fedspeak is due, as the Fed continues to broadcast its tolerance for inflation to run hot and commitment to maintain ultra-accommodative policy conditions until the labor market fully recovers. Governor Waller delivers a speech (Monday), Quarles talks about the Financial Stability Board (Tuesday), William’s participates in a moderated discussion (Tuesday), Harker tackles community banks and fintech (Thursday), and Bostic joins a NBER conference of inequality (Friday). There is nothing scheduled from Chairman Powell this week.

The corporate earnings docket remains quite lean this week. No reports are scheduled for Monday. Tuesday has Lululemon, McCormick, BioNTech, and FactSet. Wednesday brings Micron Technology, and Walgreens Boots. Thursday has CarMax. Friday reveals Carnival Corp’s results.

In Canada, the January GDP report (Wednesday) is the star attraction on this week’s calendar. We expect a 0.7% jump in GDP during January after the 0.1% gain in December. The February industrial product price index (Wednesday) and February building permits (Thursday) round out the calendar, but the two reports will be overlooked by the market is nearly always the case. There is nothing from the BoC this week. The next rate announcement is on April 21.

ASIA

As around the rest of the globe, the focus will remain on yields, the inflation outlook, Covid cases, and progress on the vaccine rollout. The regional calendar is fairly busy this week and features the usual heavy month-end data from Japan including unemployment, retail sales, industrial production and manufacturing PMI. China reports manufacturing PMIs. Elsewhere, the usual mix of trade, production and prices are slated. There are no regional central bank meetings scheduled.

Japan’s docket kicks off with February unemployment (Tuesday), seen ticking up to 3.0% from 2.9%. The job offers/seekers ratio will likely remain steady at 1.10. February retail sales (Tuesday) are projected to contract at a -5.0% y/y pace for large retailers versus -7.2% previously, and at a -2.0% y/y clip from -2.4% overall. February industrial production (Wednesday) is forecast to have fallen -1.0% y/y versus the January rise of 4.3%. February housing starts (Wednesday) are estimated to have declined at -6.0% y/y rate from the prior -3.1%. February construction orders are due Wednesday as well. The March Tankan report (Thursday) is set to improve to 2 from -10 for large manufacturers, and to -3 from -5 for large non-manufacturers. The March manufacturing PMI (Thursday) likely improved to 51.7 from 51.4. March auto sales are due Thursday as well. In China, the official March CFLP manufacturing PMI (Wednesday) is expected to improve to 51.0 from 50.6. The March Caixin/Markit manufacturing PMI (Thursday) is estimated to have risen to 51.5 from 50.9

South Korea February industrial production (Wednesday) should rise 1.0% y/y from the previous 7.5% gain. The March trade report (Thursday) is expected to see the surplus rise to $4.0 bln from $2.6 bln. Malaysia February trade (Monday) should see the surplus narrow to MYR 15.0 bln from MYR 16.0 bln. Hong Kong February retail sales (Tuesday) are expected to surge to a 45.0% y/y growth rate from -13.6% on a value basis, and to 43.0% y/y from -14.5% on a volume basis. The huge gains expected are due to base effects given the comparison to February 2020, when the start of the pandemic saw sales plunge nearly -47%. Thailand February manufacturing production (Wednesday) is seen bouncing to a 2.0% y/y clip from -2.8%. February trade and current account figures are due Wednesday as well. Indonesia March CPI (Thursday) is estimated to have ticked up to 1.5% y/y from 1.4%.

In Australia, retail sales, the trade report and building approvals fill out the calendar this week. Retail sales (Thursday) are expected to fall -1.1%, matching the preliminary estimate for February after the 0.5% gain in January. The trade surplus (Thursday) is seen narrowing slightly to A$9.5 bln in February from the A$10.1 bln surplus in January. Building approvals (Wednesday) are projected to climb 2.0% in February after the -19.4% plunge in January. The next central bank event is the April 6 policy meeting. We expect no change to the current 0.10% rate setting. In March, the RBA left monetary policy unchanged, as had been widely anticipated and maintained guidance that the cash rate won’t be hiked until employment and inflation targets are met.

New Zealand’s calendar is thin, with building permits (Tuesday) highlighting. The next RBNZ meeting is on April 14, with no change to the 0.25% policy setting expected.

EUROPE

Eurozone: a holiday-shortened week is on offer, with Europe essentially closed for the long Easter weekend from Friday to Monday. Virus case numbers are not encouraging — hence, the relaxed lockdown that had been in place across much of the Eurozone has been tightened again in many places with officials clearly eager to prevent too much travel and too many private parties over what usually is a very busy holiday period. Despite the warnings of an intensifying new wave and the risk of new infections, many German regions are preparing to re-open large parts of the services sector after Easter, thanks to a strategy that relies on rapid tests at the entrance to events, or to obtain 24-hour “freedom passes.” Coupled with hopes of accelerated vaccination programs in the second quarter, that seems to be one of the reasons that Germany’s services sector is finally seeing the light at the end of the tunnel.

Confidence data for March has been much better than expected and PMI readings suggest an improvement in overall economic activity, as services sector confidence rebounds and manufacturing continues to strengthen. The European Commission’s ESI Economic Confidence indicator is the final of the major surveys and is likely to confirm the overall picture, with the headline seen rising to 95.5. That is already more cautious than consensus expectation for a jump to 96.0.

Confidence data also showed an improvement in labour market conditions, with employment starting to pick up — against that background we are looking for a decline in German March sa jobless numbers of -5K (median -3K), which should leave the sa jobless rate unchanged at 6.0%. Data remain heavily impacted by labour market programs and wage support schemes and it will take a long time before markets have tightened to an extent that would put upward pressure on wage growth.

Still, the manufacturing sector is facing supply chain constraints and a sharp rise in input price inflation, which will feed through headline CPI rates in coming months. For now, the expected jump in March numbers, due mainly to base effects from energy prices, has been well advertised. German HICP inflation (Tuesday) is expected to reach 2.0%, which would actually be in line with the ECB’s implicit target. However, with the ECB focusing on keeping spreads in and supporting the smaller economies that rely heavily on tourism and less on the already recovery manufacturing sector, Germany’s headline rate is likely to run above the Eurozone average for a while. Overall, Eurozone HICP is expected to come in considerably lower, although at an estimated 1.4% y/y (median same) it will also be much higher than the 0.9% y/y in February.

The combination of strengthening demand and rising inflation backs the ECB’s decision to front load the purchase schedule, but not increase the overall PEPP envelope, which give the ECB some flexibility to react to the possibility that underlying inflation pressures start to rise. However, as long as economies haven’t re-opened fully, that is unlikely to be the case. Indeed, comments from central bankers including Lane and Villeroy are likely to confirm the ECB’s supportive stance for now.

Data releases also include German import price data for February, which is expected to jump sharply higher, as well as German retail sales and French consumption data for February.

U.K.: incoming BoE policymaker remarks have been reflecting the overall brightening outlook for the UK economy. Monetary Policy Committee member Saunders on Friday that unemployment is not likely to show the extent of rise that was forecast by the central bank in February, upbeat remarks — although lacking the jauntiness displayed by his colleague on the MPC, BoE Chief Economist Haldane, who said that he expects a “rip-roaring” recovery, with consumers chomping at the bit to spend lockdown savings. The preliminary March PMI survey data, released last week, smashed expectations, finding businesses reporting that an increase in consumer demand in anticipation of societal reopening was already under way.

The UK vaccination status, alongside the rate of Covid infection and mortalities, remain encouraging, though there is some evidence of new outbreaks in some areas as a consequence of schools reopening, while vaccine supply issues out of Europe and India will slow progress over the next couple of months. There are concerns about the emergence of new variants that will render existing vaccinations obsolete, or at least less effective, which is the reason behind the UK government’s draconian decision to make it illegal for its citizens to take foreign holidays in the months ahead.

The data calendar this week brings monthly February BoE lending and money supply data (Monday), along with the third estimate on Q4 GDP (Wednesday) and final March PMI data (Thursday). The lending and GDP are too backward looking to have much impact.

As for the final March PMI report on manufacturing and services, the consensus is for unrevised readings. Preliminary March UK PMI data came in much stronger than expected, with the headline composite reading rising to a seven-month high of 56.6, up from 49.6 in February. The median forecast had been for a much more modest improvement, to 50.6. The manufacturing PMI headline came in at a 40-month high at 57.9, improving from 55.1 in the month prior. The services PMI rose to a seven-month high at 56.8, advancing sharply from 49.5, with the sector expanding again after four consecutive months of contraction. This is the first month since last September that both the manufacturing and services sectors have seen a rise in new orders. A rebound in sales into easing lockdown measures, which has come on the back of a so-far successful and rapid Covid vaccination program, drove the improvement. Consumer confidence increased and the survey highlighted a surge in demand for residential property services. It is also notable that service sector activity overtook manufacturing sector activity for the first time in the pandemic era, and the survey also evidenced the release of pent-up demand, with businesses rebuilding capacity in response to rising consumer demand. The data showed the first increase in staffing numbers in the private economy since February 2020, with the rate of job creation at the highest in almost two years. Optimism about the 12 months head rose for a third consecutive month, and stood at the highest level seen since the index began in July 2012. Input costs spiked by the most in over four years, which was accompanied by the highest rate of output charge inflation in over three years.

Switzerland: the data calendar brings a number of key releases, including the March KOF leading indicator (Tuesday), March CPI inflation data, February retail sales and the March manufacturing PMI report (all due Thursday). The KOF and PMI data are expected to show moderate headline improvements, and for the most part won’t capture the recent increase in Covid related lockdown measures in much of continental Europe. As for CPI, the median forecast is for a rise to a -0.3% y/y headline, up from -0.5% y/y in the month prior.

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated weekly to help provide our readers with timely insights. Readers should do their own research before making any investment.

Solid Picks

This group of stock/ETF picks is likely to experience growth and perform well into the near future. The “Fair Value” is a calculation using a discount cash flow analysis to determine the Intrinsic Value. The rank score of a stock, where a score of 1 is best. This algorithm compares a company to its peers and considers the consistency of key return metrics. Share Value is what they think the price per share should be. The overall score, which 99 is the best) is computed from the percentile rank of valuation, growth, financial strength, efficiency, momentum, and dividends. The score also considers the past performance of a stock in each of the component areas relative to peers.

Income Stock & ETFs Picks

This list of stocks and ETFs are selected for their ability to pay dividends. The dividend score of a stock, where a score of 99 is best. This algorithm compares a company to its peers and considers the consistency of key dividend metrics as well as their direction of change. The overall score, which 99 is the best) is computed from the percentile rank of valuation, growth, financial strength, efficiency, momentum, and dividends. The score also considers the past performance of a stock in each of the component areas relative to peers.

Dividend Growth Stocks

ETFs

Dogs of the Dow

This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. The dividend score of a stock, where a score of 99 is best. This algorithm compares a company to its peers and considers the consistency of key dividend metrics as well as their direction of change. The overall score, which 99 is the best) is computed from the percentile rank of valuation, growth, financial strength, efficiency, momentum, and dividends. The score also considers the past performance of a stock in each of the component areas relative to peers.

Economic Data Calendar

The last week of March culminates with the March Jobs report, where we expect a solid 500k nonfarm payroll increase and a drop in the jobless rate to 6.1% from 6.2%. Construction spending is expected to fall sharply in February with a big weather hit, while consumer confidence climbs in March with support from another round of stimulus checks. The ISM should ease modestly into March from a 2-year high, while the ISM-NMI continues to climb.

Week of March 29

The shipping bottleneck in the Suez canal will aggregate the widespread capacity constraints that are already hobbling U.S. economic growth, both via direct disruptions to shipping, and via delays in commitments for future shipping that will extend for months. The container shortage in Asia will be aggravated by delays, hence prompting continued shortages of imported goods in the U.S. retail sector. The U.S. is reportedly exporting empty containers to Asia so they can receive them more rapidly, hence disrupting U.S. export capacity as well. The vehicle sector faces semiconductor shortages that will hamper both assemblies and sales through the first half of 2021, though early reports suggest that vehicle sales were solid in at least February. The petrol-chemical complex is still reeling from disruptions with the February power failures and Texas freeze, and the drilling moratorium will increasingly disrupt activity in this critical growth engine for the economy.

The result is that we may see more upward Q2 pressure on prices than “real” spending than we had assumed, both with regard to consumer goods and for housing. In particular, we are poised for big real estate price gains in the seasonally important spring season, as homes are in historic short supply, alongside climbing demand. Stimulus deposits may place less upward pressure on “real” spending than on prices overall, and on home prices in particular. Most of the U.S. economy has already climbed well above pre-pandemic highs, and disruptions from events like the Suez fiasco and the Texas freeze will be bigger than they would have been if most major sectors of the economy still had some slack.

Consumer Confidence: 96.0

Consumer confidence is expected to rise to 96.0 from 91.3 in February, versus a 6-year low of 85.7 in April of 2020. This compares to an 18-year high of 137.9 in October of 2018 and a recession-low of 25.3 in February of 2009. We expect the present situation index to improve to 97.9 from 92.0 in February and a 7-year low of 68.4 in May of 2020, versus a 19-year high of 176.0 in August of 2019 and a recession-low of 20.2 in December of 2009. The expectations index should rise to 94.7 in March from 91.2, versus an 18-year high of 115.1 in October of 2018 and a recession-low of 27.3 in February of 2009. We expect the 1-year inflation measure to tick down to 6.2% from 6.3%. All the confidence measures climbed into late-Q1 with vaccine distributions, stimulus deposits, and the easing of coronavirus restrictions, following a slight downward tilt through the holidays. We may get an extra March boost for the Conference Board measure given that it is a late-month reading that will capture actual March stimulus deposits, and not just the January distributions.

Initial Jobless Claims: 670k

Initial jobless claims are expected to ease to 670k, following last week’s drop to 684k from 781k. The unwind of initial claims from the holiday peak has generally proven quite slow likely thanks to elevated job churn, though last week’s big drop was encouraging. Claims are expected to average 715k in March, after averages of 789k in February, 852k in January, and 825k in December. The 781k BLS survey week reading follows prior survey week figures of 834k in February, 875k in January, and 892k in December. We assume a 500k March payroll rise after the 379k February gain.

Continuing claims fell by -264k to 3,870k in the week of March 13, following an upwardly revised 4,134k figure. We expect continuing claims to fall -170k to the 3,700k area for the week ending on March 20. We expect continuing claims to extend their downtrend through Q2. We saw continuing claims to fall -549k between the February and March BLS survey weeks. We saw prior drops of -366k in February, -537k in January, -767k in December, -1,734k in November, -4,924k in October, -1,745k in September, -2,459k in August, -2,280k in July, and -1,610k in June.

Construction Spending: -1.0%

Construction spending is expected to fall -1.0% in February after a 1.7% January increase, thanks to a big weather hit in the south, midwest, and northeast. We expect a -0.6% private residential construction decrease after a 2.5% January rise, a -1.0% decline for public construction after a 1.7% January bounce, and a -1.5% private nonresidential drop after a 0.4% January increase. We expect construction spending to grow at a 12.0% pace in Q1, following rates of 18.6% in Q4 and 10.9% in Q3. Construction hours-worked from the jobs report fell -3.6% in February, and construction jobs fell -61k. All the housing measures have rebounded sharply since Q2 of 2020 with an array of new 14-year highs across various metrics in recent months. This should translate to a lagged climb in construction spending into 2021.

ISM/ISM-NMI: 60.0/57.5

The ISM index is expected to ease to 60.0 from a 2-year high of 60.8 in February, versus an 11-year low of 41.5 in April last year, a 14-year high of 60.8 in August of 2018, and a low from the last recession of 34.5 in December of 2008. The all-time low for the measure is 30.3 in June of 1980. The ISM-NMI index should rise to 57.5 from 55.3 in February, versus a 17-month high of 58.1 in July, an 11-year low of 41.8 in April, a 13-year high of 61.2 in September of 2018, and an all-time low of 37.8 in November of 2008. Producer sentiment has remained firm into 2021 as businesses scramble to rebuild inventories, with an added lift into March from expanding vaccine availability and two rounds of stimulus distributions in January and March.

Employment: 500k

We expect a 500k March nonfarm payroll increase, after gains of 379k in February and 166k in January. We assume a 40k factory jobs increase in March, after a 21k February rise. We assume the jobless rate will tick down to 6.1% from 6.2% in February, and 6.3% in January. Hours-worked are assumed to rebound 1.0% after a -0.5% February dip, with the workweek rises to 34.8 from a weather-depressed 34.6 in February. Average hourly earnings are assumed to rise just 0.1% in March, as we further unwind the December distortion that left a 1.0% earnings surge with a big drop in low-wage workers. The y/y wage gain should slip to 4.5% from 5.3% due mostly to an easier comparison. We previously saw a 3.5% expansion-high pace for y/y wage gains in both February and July of 2019, before the pandemic-boost to an 8.0% peak in April of 2020. We expect the payroll rebound to gain steam in 2021 following the winter lull, thanks to stimulus deposits and vaccines.