Economic Update: April 2021

Jerome Lander | May 18, 2021 3:08:11 PM | goals based investment

US equities again pushed to record highs in April against the backdrop of an increasingly dovish Federal Reserve, improving economic data, strong earnings from big US corporates and the ever-improving vaccination rollout to combat the COVID-19 pandemic, with total US vaccinations breaking the 100 million mark during the month of April.

Once again, the Federal Reserve conveyed its intent to keep interest rates close to zero for the foreseeable future to support the economic recovery for the COVID-19 pandemic after first slashing rates over one year ago. 

The US unemployment rate remained at 6.0%, despite more than 2 million fewer Americans in the labour force compared to pre-COVID levels. The Federal Reserve expects the economy to perk up in the months ahead, with some investors worried about the fast return of inflation in the economy. 

The March CPI reading in the US came in hotter at 2.6%, which is the fastest y/y increase since August 2018. The yield on the US 10Y government bond rallied to 1.7% in March but largely consolidated in April, showing that much of the current inflation expectations are priced in already. Mega-cap growth names in the US regained their strong position in Q2 after underperforming in Q1 mainly due to the rise in yields during that time. 

April 2021 Summary:

  • Small-caps lagged while Large-cap names pushed to record highs during April as yields pulled back.
  • The US 10Y bond found support, with the yield consolidating from the highs seen in March.
  • Economic data, corporate earnings and the ever-improving vaccine rollout boosted sentiment and pushed US equity markets to new highs.
  • The ASX 200 gained 3.47% in April, though underperforming the 5.24% rise in the S&P500.
  • The AU 10Y yield finished the month at 1.79% but experienced significant volatility during the month.
  • The US Dollar gained ground against the Australian dollar, which gave back 1.6% during April.
  • The US Dollar appreciated against most of the major currencies during the month, with the EUR 3.3% and the JPY 3.7% experiencing its brunt.
  • Business and consumer sentiment in Australia moved back above pre-COVID levels as the economy continues to recover.
  • The Australian housing market remained in focus, building approvals for the month up an astonishing 21.6% m/m.

US Sector Analysis

At the sector level, REITS in the US are leading the way in Q2 +8.2%, with Communications names close behind +7.9%, both of which have doubled their Q1 performance already. Consumer Discretionary names also posted good gains +7.2% as the vaccination rates climb and restrictions are peeled back across the country. Financials are now up close to +24% YTD after performing poorly in 2020 and gained +6.7% for the month of April. The Energy sector largely consolidated YTD gains during the month +1.1%, although the sector is still leading since the start of 2021. 

Interest Rates

Inflation expectations and readings have been ticking higher, as has the M2 money supply in the US, a common indicator for rising inflation. However, bond yields steadied after snowballing during the first quarter of 2021, showing that inflation expectations may be largely priced in at current levels. Closing the month at 1.63%, the US 10Y settled during the month after probing 1.75% in March. 

Commodities

Lumber prices have been surging since late 2020 as demand for new homes, and the building industry is on the rise in the US, becoming a key story in the commodity space. April Lumber futures contracts exploded higher, closing April at around $1,500 after finishing March at $1,008 per contract. The price of Gold recovered modestly during the month, after a poor start to the year, closing at $1770/oz. This has puzzled many as Gold is commonly used as a hedge against inflation but has not yet responded. 

Cryptocurrency

Bitcoin experienced large price swings during the month of April. After pushing to new highs of $63,450 per coin, it fell to below $50,000 but quickly bounced back above $57,000. Ethereum, along with many other crypto coins, saw new highs in April as the sector sees a flurry of retail and wholesale investors entering the space. The proposed VanEck Bitcoin ETF review has been delayed by the SEC. Many think the expansion of ETFs into the crypto space will provide a boost to the market and give more investors access without having to buy coins directly. 

The Months Ahead

With a backdrop of a quickly reopening economy in the US, as the COVID-19 pandemic comes under control locally, a supportive Federal Reserve and a solid earnings season behind us, markets could be headed higher before running out of pace. The old 'sell in May and go away' adage may not be appropriate in the current climate, giving the slew of bullish factors seen currently. However, market pundits will continue to watch interest rates, global COVID-19 cases and elevated valuations with caution.