The current business cycle has been unprecedented. Last year’s recession was among the worst in US history, but it lasted just two months. The V-shaped recovery in real gross domestic product (GDP) has been one of the fastest on record, with real GDP likely to surpass its previous record high (in the fourth quarter of 2019) during the current quarter. That means that the full recovery in real GDP lasted five quarters, with the economy now in the expansion phase of the business cycle. Not surprisingly, this remarkable performance has been reflected in the unprecedented V-shaped recovery in corporate earnings, also to record highs, in recent months. The stock market has risen nicely year-to-date on the strength of first quarter earnings reports as the economy has continued to re-open from the pandemic shutdown. For the companies in the S&P 500 index, earnings in the first quarter rose 50% from the year earlier on an 11% increase in revenues. While analysts had been expecting very strong comparisons to the weak year-ago quarter, the actual earnings were 23% higher than expected. Moreover, every sector reported stronger than expected earnings. Consensus estimates for earnings growth for the full year have now risen to 37%. The market has not risen nearly as high as the earnings growth as valuations have declined somewhat from their very high levels, but clearly, earnings are winning the tug-of-war with valuations thus far in 2021. However, we would note that since 1930, more than 1 out of every 4 years which saw corporate earnings grow, the stock market finished the year with a loss.
For additional color on the first quarter earnings, we have initiated a podcast, Five Minute Finance with LVM, which you can listen to by clicking on this link: Five-Minute Finance with LVM. It will be available for download on your favorite podcast app later this week (e.g. Apple Podcast and Spotify) We will be sending links to future Five-Minute Finance podcasts which will cover educational information on economic releases, stock and bond market fundamentals, retirement planning, estate planning and other financial topics
Meanwhile, policymakers continue to step on their growth accelerators, hoping that inflation and financial stability remain under control. While fiscal and monetary policies can affect economic growth in the short run, what really drives economic progress is human ingenuity and the innovation it produces. There are very clear signs of inflationary pressures; the question is whether this is transitory due to supply chain shortages or a longer-term phenomenon. Arguing against a return to sustainably higher inflation are the demographics of an aging population, the massive debt build-up which is deflationary, and continued improvements in productivity.