-Darren Leavitt, CFA

US equity markets finished mixed on the week as Q1 earnings continued to surprise to the upside.  Markets pulled back sharply on Thursday on reports that the Biden administration will propose increasing the capital gains tax, and economic data continued to come in better than expected.

For the week, the S&P 500 lost 0.1%, the Dow shed 0.5%, the NASDAQ gave back 0.3%, and the Russell 2000 managed a gain of 0.4%.  US Treasury markets traded in a tight range throughout the week.  The 2-year note yield increased one basis point to 0.15%, while the 10-year yield closed unchanged at 1.57%.  Gold prices fell $2.10 to close at $1778.10 an oz.  Oil prices traded off, fractionally losing $1.01 to close at $62.15 a barrel.

Q1 earnings continue to come in better than expected.  25% of the companies within the S&P 500 have reported earnings.  According to FactSet, 84% of the reported companies have had better than expected earnings, and 77% have beaten expectations on revenues.  In the coming week, another 181 S&P 500 companies are set to report, and 10 of 30 Dow components will report.

On Thursday, the New York Times and Bloomberg ran reports that the Biden Administration will increase the capital gains tax rate to 39.6%, up from 20% on those earning more than one million dollars.  The proposed increase comes on top of the current 3.8% tax on investment income to help fund the Affordable Cares Act.  In addition to the increase, these individuals would be subject to state and local taxes as well.  Interestingly the market did not respond to the NY Times article early in the day but did sell-off on the Bloomberg story that came across the tape with a couple of hours left in the trading session.  Some pundits suggested the sell-off was just an excuse to sell a hot market-  this may have some weight given the buy the dip investors that moved markets materially higher on Friday.

Initial Jobless Claims fell to the lowest level since the pandemic started.  Data showed that 547k had filled out claims versus the consensus estimate of 600k.  Continuing Claims also trended lower, coming in at 3.674 million from last week’s reading of 3.708 million.  New Home sales soared, showing an increase of 20.7% on a month over month basis and coming in at a 1.021 million annualized rate.  Preliminary data on manufacturing and services also topped estimates.

The information in this Market Commentary is for general informational and educational purposes only. Unless otherwise stated, all information and opinion contained in these materials were produced by Foundations Investment Advisers, LLC (“FIA”) and other publicly available sources believed to be accurate and reliable.  No representations are made by FIA or its affiliates as to the informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. No party, including but not limited to, FIA and its affiliates, assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

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Markets Hit New Highs in the Wake of Last Week’s Fed ReMarcs

Chairman Powell walked the line between giving too much and too little in the way of monetary accommodation during prepared reMarcs to Congress last week. Markets have responded positively and are at all-time highs. We will see if we get follow through after the Fed meeting later in the month and a decision on a cut in interest rates.

The Dow industrials index has broken out and is outperforming the S&P 500 after lagging throughout the first part of 2019. The industrial sector has experienced earnings weakness related to the trade war with China. I believe it is a positive sign that we are seeing that part of the overall Market turn around. We are also seeing strength in the transportation sector and the small cap index. I stated several weeks ago that if I had one wish it would be for transportation and the riskier small cap indices to catch up to the S&P 500. While they haven’t quite caught up, they are doing well. Dow theorists would love to see the transportation reach new highs parallel to the industrials.  According to Dow theory, when the industrials and transports reach new highs together, it is evidence of a new bull Market.

Foreign Markets continue to lag. Yesterday China reported the slowest growth since the 1990s. The trade issues are clearly adding to a weakening economy overall. The fact is that the U.S. remains the strongest economy in the world by some distance. We would benefit from some strength in the economies of our trading partners, including China. I remain hopeful that a trade resolution can be reached with China one way or the other. We received word last week that trade talks have resumed, so let’s keep our fingers crossed.

Finally, the yield curve is steepening, which is helpful to banks and other financial stocks. It is generally a good thing for the overall Market when banks are making money.

At Cabana, we remain moderately bullish.

Key terms:  

The Dow theory is a theory that says the Market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time. (www.investopedia.com)

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