This week, CIO Tom Weary, CFA®️, discusses surprising strength in the labor market as the economy continues to heal. He also notes how economic growth has been good for the financial markets before sharing earnings from RFA Core Portfolio holding Constellation Brands and RFA Defensive Portfolio holding Conagra Brands.


Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  Well, it will be a couple of weeks before earnings season kicks into gear, although we did hear this week from a couple of our companies in the Consumer Staples sector.  But before looking at those reports let’s turn first to updates on the economy and the financial markets.

Last Friday, when the stock market was closed in observance of the Good Friday holiday, the government reported surprising strength in the labor market with Nonfarm Payrolls rising 916,000 in March versus expectations of an increase of only 660,000.  Much of the increase was due to the travel and hospitality industries as pandemic related restrictions are being eased.  In a separate survey, the Unemployment Rate dropped to 6% which was inline with forecasts.  While both figures count as good news, as you can see in this next chart Nonfarm Payrolls are still 11 million jobs below where they would have been without the impact of the pandemic.  We have a long way to go, but things are looking up.  The Job Openings Survey also came in well above forecast at a near-record 7.4 million in February, so hopefully we will continue to chip away at that 11 million jobs deficit.  Job creation is being driven not only by the lifting of pandemic restrictions but also by an increasingly strong economy as can be seen in the most recent ISM Purchasing Manager Indices.  On the Manufacturing side, the March PMI came in well above expectations at 64.7, as can be seen in this next chart.  And on the much larger Services side, the March PMI skyrocketed to 63.7, as we see in this next chart.  The economy appears to be booming and we have barely lifted many restrictions yet.  J.P. Morgan’s CEO Jamie Dimon wrote in his annual letter to shareholders released this week that the U.S. economy may very well boom through 2023 thanks to all the government stimulus and monetary support.  Wow, what a turnaround from a year ago!

Financial markets have taken note of the rapid strengthening in the economy.  This first chart shows the sudden spike in the yield of the 2-year Treasury Bond, which analysts believe is the one most sensitive to future moves by the Fed.  This next chart showing the spread on the yield between 2 and 5-year Treasury Bonds further indicates that the bond market is suddenly expecting much stronger economic growth in the next few years as rates have risen even faster for the 5-year Treasury Bond.  And this next chart of the entire Treasury Bond Curve, showing yields from 1-month T-bills to 30-year bonds, illustrates how the Fed is holding down rates at the short end while investors’ expectations for low inflation are holding rates steady at the long end.  The bond market is clearly signaling strong economic growth in the medium term where rates are rising the most.  Of course, rising bond yields means falling bond prices, and the first quarter has been a rough one for bond investors.  As you can see in this next chart, the first quarter of 2021 was the worst quarter for government bond investors since 1980 when interest rates were soaring.  This has sent fixed income investors scrambling, driving junk bond yields to historically low spreads over Treasuries, as we see in this next chart.  You can hardly call them High Yield bonds at these levels.  And, naturally, the hope for sustained, strong economic growth has been good news for the stock market, with the S&P 500 Index breaching 4,000 on April 1st, as we see in this next chart.  The pullback of a year ago is a mere blip in this picture of the past 30 years.  And as this last chart shows, volatility has disappeared again, with the VIX dropping well below its long-term average value of 20 after exploding to over 80 a year ago.  The markets are forecasting good times ahead.  Let’s hope they’re right.

On Thursday we heard from two of our companies in the Consumer Staples sector.  Constellation Brands, a Core Portfolio holding, beat on both the top and bottom lines, with sales of nearly $2 billion beating by $80 million and earnings of $1.82 beating by 27 cents.  However, the company gave very conservative guidance for beer margins which disappointed analysts, hitting the stock price. So do your part and go have a Corona or Modelo beer.  Think of it as supporting your stock.  And Defensive Portfolio holding Conagra Brands also beat on the top and bottom lines, with revenue of $2.8 billion increasing over 8% from last year and beating by $50 million while earnings of 59 cents beat by a penny.  Organic sales increased by 9.7%, well above consensus views for 6.7%.  Looking ahead, the company says it has seen a sustained increase in demand in its retail segments when compared to pre-COVID-19 demand levels, driven by continued elevated at-home eating as well as the impact of customers beginning to rebuild inventories.   Solid results from both companies.

So, what does it all mean?   Even in the early stages of lifting pandemic-related restrictions, the U.S. economy appears on the verge of very strong sustained growth as the labor market continues to heal.  Financial markets are predicting an extended period of strong growth with both stock prices and interest rates rising.  Your companies continue to surprise Wall Street analysts with strong results.  The test in coming weeks will be whether reported results will be strong enough to satisfy investor expectations.  We will stay on top of the details for you.  So, please, sit back, relax, and join us again next week for the RFA Weekly Market Update.

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