VIDEO: What Uncle Sam Got Right About The Economy
Welcome to my video presentation for Monday, May 3. The article below fleshes out my themes in more detail.
The coronavirus Cassandras who bet against the economy and the stock market bet wrong. Investors who panicked during the trough of the pandemic and dumped stocks left a lot of money on the table. So far in 2021, the bears have been “the dumb money.”
After the worst decline last year in U.S. gross domestic product (GDP) since the Great Depression, the economy is growing at a torrid pace. We witnessed the fastest bear market in history last year, followed by a market recovery unprecedented in speed and scope. Stocks currently hover at record highs.
What did America do right?
For starters, the federal government got substantial relief directly into the hands of those who needed it most. The U.S. response was unusual compared to other countries because it focused on spending to increase the incomes of its residents. The “helicopter money” did the trick. Much of that stimulus money found its way into consumer spending.
See the following chart, which includes policies under the Trump and Biden administrations through March 2021. The data takes into account Biden’s $1.9 trillion relief package:
In 2020, the poverty rate in the U.S. actually fell, due to stimulus checks and other assistance. U.S. household income surged by a record 21.1% in March 2021. American households currently sit on $4.1 trillion in savings, up from $1.2 trillion before the COVID-19 outbreak. At the same time, unemployment is dropping.
The Commerce Department reported last Thursday that U.S. GDP grew in Q1 at a vigorous year-over-year rate of 6.4%, propelled by healthy consumer spending. For calendar year (CY) 2021, analysts expect GDP to expand by nearly 7%, which would represent the fastest CY growth since 1984.
Consumer spending rose 2.6% during Q1 2021 and it’s likely to continue rising as cooped-up consumers dip into their savings to enjoy the emerging “yolo” (you only live once) sensibility.
Also stoking the economy has been monetary stimulus from the Federal Reserve, which has pledged to continue its bond-buying program and keep interest rates low.
As COVID-19 cases spiked in some countries, global and U.S. stocks fell last Friday and ended the week mixed. Nonetheless, stocks booked monthly gains and are higher year to date (see table).
The S&P 500 posted its third consecutive month of gains in April, rising more than 5% as companies returned to profitability. On Monday, the first trading day of May, U.S. stock futures were in the green before the opening bell.
Corporate earnings for the first quarter have been strong. Silicon Valley behemoths thrived during lockdowns and they’ve blown past earnings estimates.
As of April 30, more S&P 500 companies are beating earnings estimates for the first quarter than average and beating earnings estimates by a wider margin than average, according to research firm FactSet.
About 60% of S&P 500 companies have reported actual results for Q1 2021 to date. Among these companies, 86% have reported actual earnings above estimates, which exceeds the five-year average of 74%. Companies are in aggregate posting earnings that are 22.8% above consensus estimates, which far exceeds the five-year average of 6.9%.
The blended year-over-year earnings growth rate for Q1 is a whopping 45.8% (for a sector-by-sector breakdown, see the following chart).
Keep in mind, this high rate of earnings growth is partly due to an easier comparison to exceedingly weak earnings in Q1 2020. Still, earnings growth this season is a substantial tailwind for stocks.
Analysts expect double-digit earnings growth for the remaining three quarters of 2021, with earnings growth projected to peak in Q2 2021 at 58.3%.
The mega-cap tech leaders saw their profits surge in Q1, as the pandemic fueled demand for work-at-home apps, video games, teleconferences, business and personal networking, telemedicine, streaming video, social media, e-commerce, and a wide range of other digital services (see chart).
When the global economy finally gets on the other side of the coronavirus crisis, these tech companies will be in even stronger shape. The pandemic is causing permanent shifts in buying habits, consumer expectations and workplace practices.
Especially appealing under current conditions are small-cap tech innovators that trade at reasonable valuations. These smaller fry in niche industries don’t get the same fawning coverage on CNBC as the huge “story stocks,” but they’re poised to outpace their larger brethren.
The upshot: The bull probably has further to run, but stay selective because valuations are getting frothy. You should consider the specific trading advice of Rapier’s Income Accelerator, a new investment service run by my colleague Robert Rapier.
I closely work with Robert on his other service, Utility Forecaster, so I know firsthand that Robert’s trades are income-generating machines. They make money regardless of government policies, economic ups-and-downs, or pandemic uncertainties.
As chief investment strategist of Rapier’s Income Accelerator, Robert has devised a new, safe way to quickly generate cash on demand, without touching exotic assets that can wipe out your nest egg. Click here for details.
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John Persinos is the editorial director of Investing Daily. To subscribe to his video channel, follow this link.