Both traditional and higher-frequency economic data remain under considerable pressure: December retail sales fell 0.7% month over month, the NFIB Small Business Optimism Index fell to the lowest point since May, initial jobless claims rose to nearly 1 million, and OpenTable restaurant reservations fell to 40% below pre-COVID-19 levels. This discouraging data may help clear a path for additional fiscal stimulus and ultimately usher in stronger economic growth later in the year.
The headline Consumer Price Index ticked up 1.4% year over year with the core metric up 1.6%. However, under the surface there has been considerable volatility in prices over the last year. For example, the gasoline index increased 8.4% month over month in December but remains 15.2% lower than a year ago. To us, this stresses the impact a lower base has on future comparisons and the importance of incorporating this context into inflation analysis.
Domestic equities cooled off last week as earnings season began and markets grappled with the potential impact of new fiscal stimulus, slower-than-expected vaccine distribution, and heightened valuations. Against this backdrop, large cap was down on the week while small and mid cap delivered positive returns.
As earnings revisions lean lower and prices keep moving higher, relative valuations are also being impacted. For example, the relative spread of the Russell 2000® Value and Nasdaq-100® FY1 price-to-earnings ratios are at the highest level since early 2012 (1.26), suggesting the Nasdaq-100 valuation is lower than the historical relationship between the two (average of 0.99).
The MSCI World ex USA Index slightly outperformed domestic equities as broad declines in cyclical sectors were offset somewhat by strong gains in the Health Care sector.
The MSCI Emerging Markets Index outperformed the S&P 500® with large Chinese technology-related companies rallying after the United States decided not to ban domestic investments in these names. Strong gains in Financials names also added to the performance upside.
Fixed Income Markets
Domestic fixed income returns were broadly positive for the week, following the sharp rise in interest rates at the beginning of this year. Credit spreads were the primary driver of performance with benchmark rates little changed. US credit outperformed, particularly in the Energy sector as spreads in investment grade bonds moved tighter while high yield spreads moved slightly wider.
Table of the Week
Fourth-quarter earnings began last week with 24 companies reporting. The blended earnings growth rate (actual growth rate combined with consensus estimates) is -7.3%, a noteworthy improvement from the -9.0% growth rate expected at quarter end.
Financials, Information Technology, and Consumer Staples have made up the majority of earnings reporters thus far. Despite a difficult backdrop over the past quarter, all Financials that have reported have beaten consensus estimates.
First-quarter earnings revisions have largely remained flat since the end of the fourth quarter and the consensus estimate for earnings growth is now 22.9% for calendar year 2021 versus 22.3% at quarter end. Earnings season ramps up this week, with another 40 companies expected to report.