By Tim Courtney, Chief Investment Officer
Over the past 18 months, with just a few exceptions, the market has been in recovery and growth mode. This was aided by deferred demand, stimulus and low interest rates. Both companies and households have refinanced, accumulated reserves and have been in good position to continue spending and economic momentum.
Even though the market has grown — by August 2021, the S&P had doubled from its March 2020 trough1 — and profits have increased, the economy itself isn’t much bigger. The GDP rose 6.5% in the second quarter of 2021, just returning to the levels seen at the end of 2019.2 Now as we move beyond the recovery, the market will be more interested and sensitive to numbers that could threaten growth and valuations.
Given that companies have been able to maintain profit levels, companies and households have healthier balance sheets and interest rates remain low, it’s understandable why markets have these valuations. It is also likely that there is more than enough momentum to continue growing into 2022. However, there are some headwinds blowing and rather than the relatively smooth ride higher we’ve recently experienced, it’s more likely we are going to have to earn our earnings moving forward.
1. CNBC (8/16/21) — S&P 500 doubles from its pandemic bottom, marking the fastest bull market rally since WWII
2. The Washington Post (7/29/21) — U.S. economy grew at annual rate of 6.5% between April and June, marking full recovery from pandemic
3. U.S. Energy Information Administration (11/7/16) — U.S. crude oil production in 2015 was the highest since 1972, but has since declined
4. CNBC (10/6/21) — Americans are paying the most for gas in seven years
5. Wall Street Journal (10/13/21) – Accelerating inflation spreads through the economy
6. CNN (6/2/21) — $6 trillion stimulus: Here’s who got relief money so far
7. The New York Times (10/6/21) — Explaining the U.S. debt limit and why it became a bargaining tool
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