The U.S. Economy Gaining Steam

The U.S. Economy is gaining steam as most states are finally “open-for-business”.

U.S. Gross Domestic Product (GDP) is now running at $22 trillion (annualized), slightly higher than $21.4 trillion in 2019 (pre-pandemic).  Real GDP in Q1 2021 was +6.4% and is expected to be: +9.4% in Q2 2021; and +5.5-6.0% in the second half of 2021.  As a comparison, U.S. GDP increases by 2.0 – 3.0% annually during a typical expansion phase. “Nominal” GDP is reported dollar GDP, while “real” GDP excludes inflation. GDP is typically reported on a “real” basis. The current extraordinary economic growth is driving up corporate earnings and thus U.S. stock markets.  S&P 500 earnings in 2021 are expected to be 18% greater than 2019, and to grow 12% in 2022.  The stock market is up 12% on a year-to-date basis this year, reflecting the anticipated strong corporate earnings.

As always there are risks to both the stock and bond markets.

If tax policy shifts to inhibit the free flow of capital, business investment would slow.  Investment capital is the fuel for job creation as new technologies unfold and, if constrained, economic activity and employment would be negatively affected. The other significant risk is if investors and countries lose confidence in the U.S. Dollar, and it loses its “reserve currency” status.  If our federal government continues to deficit spend supported by a complicit central bank it will be inevitable the U.S. currency will lose its “reserve currency status”. The U.S. Federal Government continues to deficit spend, supported by a complicit Federal Reserve Bank.  Inevitably, the U.S. currency will lose its “reserve currency status” if this trend continues. Consequently, the federal budget would have to balance through spending cuts and tax increases, thereby, reducing economic growth.

The stock market is currently trading at 22.8x 2021 earnings and 19.5x 2022, well higher than its 16.0x historical average.

These high evaluation measures indicate caution is warranted. While the markets’ P/E ratio could remain at an elevated level, the stock market is vulnerable to unforeseen negative news. 

Richard S. Lawrence, CFA June 10, 2021

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AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!