In this week’s update, CIO Tom Weary, CFA®️, discusses the spike in consumer spending and savings due to January’s government stimulus checks. He also provides updates on the manufacturing and service sectors before going over rising interest rates, fears of looming inflation, and news on the labor market. Lastly, Tom shares earnings reports from Target Corporation, Dentsply Sirona, Ross Stores, and Broadcom Inc. as well as news on an upcoming rebalance for RFA portfolios.


Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  We had a few more earnings reports dribble in this week, and we’ll get to those in a moment, but first let’s start by catching up on the latest readings on the economy.

Americans got a big bump in Personal Income in January thanks to government stimulus checks hitting their bank accounts, as we can see in this first chart.  And while that did support an increase in Personal Spending, as seen in this second chart, consumers clearly did not spend the majority of the government’s largesse.  When spending does not keep up with increases in income the balance results in an increase in savings, and as we can see in this next chart the Personal Savings Rate in January jumped to over 20%.  This is helping consumers weather the pandemic and will support future spending when the pandemic passes.  We also heard from the Institute for Supply Management, with the Manufacturing Purchasing Managers Index coming in at a surprisingly strong 60.8, signifying robust expansion in manufacturing.  However, the news wasn’t quite as good on the Services side where the PMI for February came in at 55.3 down from 58.7 in January as many parts of the country struggled with winter weather challenges last month.

Rising interest rates have led some observers to fret about a resurgence in inflation, but the next chart shows that the Fed’s favored inflation measure remains subdued at 1.5%.  In fact, as this next chart illustrates, for several years now inflation has been running well below the Fed’s targeted 2% trendline, so don’t be surprised if they let it run above 2% for a while just to close this gap.  And as this last chart illustrates, the U.S. may very well experience and economic mini-boom as we emerge from the pandemic, but that will only help get the economy back to its pre-pandemic growth trendline sooner while inflation is unlikely to spiral out of control.  The sooner we can get back to normal the better.

We also had news on the labor market this week.  On Wednesday, payroll processor ADP reported an increase in private payrolls of 117,000, well below expectations, and implying a cooling off in the labor market.  As you can see in this next chart, the rebound in private payrolls would appear to be stalling out well below the pre-pandemic peak. But then on Friday the Bureau of Labor Statistics reported an increase of 379,000 in Nonfarm Payrolls in February and a drop in the Unemployment Rate to 6.2%, implying an acceleration of job growth.  But keep in mind, even with this stronger growth in February the economy still has 9 ½ million fewer jobs than before the pandemic, so we would have to add 1 million jobs per month for the rest of the year just to get back to where we were.  We still have a long way to go in the economic recovery.

On Tuesday, Target, a holding in both Core and Defensive Portfolios, reported results that beat on both the top and bottom lines, with sales of $28.3 billion increasing by 21% from last year and beating estimates by $920 million, while earnings of $2.67 beat by 13 cents.  Comparable sales were up 21% versus consensus of 18%, reflecting comparable traffic growth of 6.5% and a 13% increase in average ticket.  Store comparable sales increased 6.9% while digital comparable sales grew 118%, accounting for two-thirds of the company’s overall comp growth.  In the face of continued uncertainty, the company is not providing sales and earnings guidance for the year which upset investors and drove the stock down.  Dentsply Sirona, a leading provider of dental supplies, blew away estimates with earnings of 87 cents beating by 23 cents on sales of $1.1 billion beating by $83 million.  The company gave a favorable outlook for 2021 as the foresee a recovery in the dental market.  Investors loved hearing that and the stock price jumped.  You will recall that last week we heard disappointing results from off-price retailer TJX Companies, a Core Portfolio holding, as it struggled with pandemic-related store closures.  Well, this week it was Ross Stores, another off-price retailer and Defensive Portfolio holding, which disappointed for much the same reason, missing analysts’ estimates on both the top and bottom lines.  However, the company was confident enough that things are turning around to reinstate their dividend this quarter.  And semiconductor maker Broadcom, a Defensive Portfolio holding, beat on both the top and bottom lines, with sales of $6.7 billion up 14% from a year ago and earnings of $6.61 beating by 4 cents.  Chief Financial Officer Kirsten Spears noted that the 23% increase in operating profit highlights the strength of their financial model.  With nearly $10 billion in cash on the balance sheet Broadcom is able to share the wealth with shareholders through a very healthy dividend.

So, what does it all mean?  The manufacturing side of the economy continues to barrel along with many manufacturers struggling to keep up with demand due to supply chain bottlenecks.  The service side is still in expansion mode but struggles more with pandemic and weather-related challenges.  The consumer is in pretty good shape, with a little help from the federal government and more on the way.  Your companies continue to rise to the challenges of the current environment, with many reporting record results.  Next week we will be conducting the semi-annual rebalancing in Defensive Portfolios.  While there won’t be any changes in the names in the portfolio, you will notice a number of trades as we bring positions sizes back in line with their strategic targets.  Remember, it’s long-term discipline that matters in investing.  So, please, sit back, relax, and join us again next week for the RFA Weekly Market Update.

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