U.S. stocks finished higher during trading this week. The Dow Jones Industrial Average and S&P 500 Index both reached new record highs, adding to their recent outperformance of the tech-heavy NASDAQ Composite Index. Data from the U.S. labor market portrayed an employment situation still in flux, with a better-than-expected weekly unemployment claims number offset by a surprisingly underwhelming April jobs report. Stock markets viewed the conflicting news in a positive light – anticipating that the Federal Reserve will continue to hold off on raising short-term interest rates for the foreseeable future.
For the week, the S&P 500 Index finished up 1.2%, while the Dow Jones Industrial Average rose 2.7%. Year to date, the S&P is up 12.7%; the Dow has gained 13.6%. Weekly first-time unemployment claims fell more than expected, to a pandemic low of 498,000, although continuing claims marginally increased to 3.69 million. The April jobs report underperformed expectations, as 266,000 workers were added to payrolls in the U.S. against consensus expectations for 1 million or more. The unemployment rate rose slightly to 6.1% due to an increase in the labor force participation rate as more individuals attempted to find a job in April. It is important not to view any one employment data point as a definitive trend indicator. While the level of hiring was not as solid as expected, it still bodes well for the recovery that the overall payroll numbers rose and the participation rate increased.
The services side of the worldwide economy – as evidenced by services Purchasing Managers Index (PMI) figures – sustained its recent growth, joining an already-healthy manufacturing sector. Additionally, U.S. corporate earnings have outperformed expectations as the recovery has gained steam. Stocks have risen over the past several months on expectations for this type of recovery. If this strong performance persists, it is possible that elevated inflation will result – forcing the Federal Reserve to raise interest rates sooner than expected. This may be the rationale for the recent underperformance of tech stocks versus other sectors. Tech companies typically reinvest earnings back into their businesses as they grow, delaying distributing cash to investors. The potential for inflation could make these future cash flows relatively less attractive than ongoing cash flows from mature, value-oriented (e.g. industrial) stocks.
The 2020 personal tax filing deadline is May 17 and we encourage you to reach out to your Wealth Advisor to discuss tax strategies for 2021. Please check out our 2021 tax guide to review useful information on tax rates, deductions, credits and deadlines. We also encourage you to review our recent articles on understanding cybersecurity threats during tax season. As always, please contact us with any questions. We are here for you every step of the way.