Bob’s Journal for 4/22

Economic Growth Surges Past Expectations

The latest economic data show the economy is growing faster than most economists expected and faster than is currently priced into the markets.

Almost all the data released recently were more positive than expected, and much of the data greatly exceeded expectations. Retail sales surged in March and showed that many households are doing well financially.

Sales increased almost 10% for the month, which was well above forecasts. More importantly, recent retail sales have been so strong that they now are higher than they would have been if retail sales had merely increased at their average rate from January 2020 through March 2021.

Much of the increased demand is for goods. That’s why manufacturing has been doing quite well for a number of months and why the recent manufacturing data have been very strong. The main problems that manufacturers are facing involve obtaining enough materials and hiring enough qualified workers.

The services sector is bouncing back as more vaccines are being administered and economic activity is continuing to increase.

But, spending on services remains below pre-pandemic levels and growth in the services sector is uneven. Sales at restaurants and bars are rising rapidly, but they are coming from very depressed levels.

Employment is not growing as rapidly as sales and production.

That’s partly because economic activity isn’t increasing at the same rate in all states. Some states are continuing to restrict activity because of high levels of COVID-19 cases, while others have few or no restrictions.

Businesses are reporting that they have trouble hiring enough workers. Some potential workers have said that they remain concerned about the potential for catching the virus at work, especially in service sector jobs. In some cases, the stimulus checks plus enhanced unemployment compensation have reduced incentives to return to work.

But the employment data also suffer from inaccuracies. The states aren’t equipped to handle the large number of claims that came in during the pandemic. They still have backlogs on processing claims and there are a lot of misfiled unemployment claims.

The employment picture likely is better than what is reflected in the official data, especially the weekly new unemployment claims numbers.

Overall, the economy is growing faster than economists expected and is likely to continue growing above expectations. That should support stock prices and push inflation higher.

Stock Market Continues to Shift

Growth company stocks, especially those of large companies, have led the market indexes higher the last few years. But there has been a rotation in the markets, and the rotation is likely to continue for a while.

Large-company value stocks had an especially weak annual performance relative to large-company growth stocks in 2020, according to Morningstar data.

But, in the first quarter of 2021, value stocks outperformed growth stocks by the widest amount in any quarter over the past 20 years.

The resurgence of value stocks relative to growth stocks wasn’t limited to large company stocks. In fact, small company value stocks outperformed small company growth stocks by an even wider margin than the large company stocks did.

The small company value stocks beat small company growth stocks by 14.66% in the first quarter, according to Morningstar.

In addition, small company value stocks are ahead of their growth stock counterparts over the past 12 months. Among large companies and mid-size companies, growth stocks still have higher returns than value stocks over 12 months.

The rotation toward value stocks began last November and accelerated in the first quarter of 2021.

Value stocks tend to be in more economically sensitive sectors. They were hit hard by the pandemic and are rapidly bouncing back as the economy reopens.

Growth stocks tend to be those that benefited from the pandemic economy, and the growth rates of some of those companies are slowing. Rising interest rates also hurt the valuations of many growth companies, especially technology ones.

Value stocks have a lot of ground to make up from their underperformance over the past 10 years. Energy companies probably won’t continue the growth they had the last two quarters. But, there is a lot of potential left in financial services, basic materials and industrials.

We moved part of our portfolios to Oakmark (OAKMX) in late 2020 to capture this opportunity and expect to continue benefiting from it.

SECURE Act 2.0 Receives First Vote Soon

The congressional leaders who sponsored the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019 are back with another bill.

The Securing a Strong Retirement Act of 2020 (SECURE Act 2.0) has a number of attractive provisions and bipartisan support.

The bill would raise the starting age for required minimum distributions (RMDs) to 75. It also would allow businesses to create automatic individual retirement arrangements (IRAs) — tax-favored personal savings vehicles intended to let workers set aside money for retirement — to let employers avoid needing to undertake the costs of establishing and maintaining an employer retirement plan such as a 401(k).

The act also would make it easier for employers to automatically enroll workers in 401(k)s and other retirement plans. Employees ages 60 and over would be allowed to make an additional contribution to help catch up on their retirement savings.

House Ways and Means Committee Chairman Richard Neal (D-Mass.) recently said the SECURE Act 2.0 would begin moving through his committee in the next few weeks.

Like the original SECURE Act, the current draft of the SECURE Act 2.0 has no provision to pay for the cost of all the tax benefits.

In the original SECURE Act, the prohibition on Stretch IRAs was attached as the revenue-raiser late in the legislative process. By then, it was too late for opponents to mount effective campaigns against it.

I expect something similar to happen as the SECURE Act 2.0 moves through Congress.

The Data

Housing starts in March reached their highest level since June 2006. Also, the starts reported for January and February were revised higher.

Total starts increased 19.4% from February to March and were up 37.0% over 12 months.

Single-family home starts increased 15.3% from February to March and 41% over 12 months.

The 12-month increases are so high because starts came to a halt early in the pandemic in 2020. The starting number for measuring 12-month growth is very low. The 12-month number is likely to be high for the next few months for the same reason.

Consumer Sentiment, as measured by the University of Michigan, increased in April to 86.5 from 84.9 in March. That’s the highest level in a year.

The current conditions component of the index increased, but consumer expectations for the next six months were unchanged.

Consumers in the survey expressed concerns about the COVID-19 vaccines. They also expect inflation to surge.

This week, I’m reporting only the data released through Wednesday. Next week, I’ll have the full week’s data.

The Markets

The S&P 500 lost 0.17% for the week ended with Tuesday’s close. The Dow Jones Industrial Average rose 0.43%. The Russell 2000 decreased 1.79%. The All-Country World Index (excluding U.S. stocks) declined 0.32%. Emerging market equities gained 0.49%.

Long-term treasuries rose 0.74% for the week. Investment-grade bonds lost 0.27%. Treasury Inflation-Protected Securities (TIPS) added 0.40%. High-yield bonds fell 0.18%.

On the currency front, the U.S. dollar lost 0.65%.

Energy-based commodities increased 2.96%. Broader-based commodities rose 3.47%, while gold gained 1.93%.

Bob’s News & Updates

My latest book is Where’s My Money: Secrets to Getting the Most out of Your Social Security. It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

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