What drives the broader markets, however, are corporate earnings, according to Edel. He said: “What is more worrying is that despite the continued positive surprises, the stronger earnings experience a less favorable market reaction. Is this because the profit rally is already fully discounted or because traders conclude that the rally has completed and is doing the best it can?
2, peak economic recovery?
Strategas recently pointed out that very hot PMI data in the past coincided with a stalled market rally, and on cue Bloomberg reported a small drop in an ISM manufacturing survey in early May. Is this the first sign of a slowdown in the economy and what did the bond market and the fall in yields react to in April?
Edel said it was premature to press the panic button. While Goldman Sachs expects growth to peak in the second quarter, this is to be expected given the V-shaped nature of the post-pandemic recovery and “does not mean growth will now shrink”.
“The complexity of the economic recovery means that the recovery is not perfectly linear,” said Edel. “For example, the US created just 266,000 jobs in April, well below the 1 million expected. Even so, many companies struggle to find workforce and have to resort to sign-up bonuses. Generous unemployment benefits, ongoing Covid concerns, and school closings have created some bottlenecks to get Americans back to work.
He added, “While this is an inconvenience, we do not see it as fatal to the recovery or the bull market.”