Quote of the Week
“Commitment leads to action. Action brings your dream closer.” – Marcia Wieder
Last week was a sort of a nothing week with the stock market indexes down in a range between zero and two percent depending on the index. This week, Monday was a down day and then at the open on Tuesday the bottom appeared to fall out of the markets. The markets rallied during the day and today the markets are rallying strongly back up to where the market open was on Monday.
I want to point out that we will get these short episodic bursts of volatility. These volatility spikes are normal and can be caused by just about anything such as a bad news report, or a bad earnings report, or Bitcoin taking a big hit. The important thing to pay attention to is whether the trend has changed and trends don’t change that fast. They take months to change direction and with our system of using mathematics they are easy to recognize.
We are still in Quad II which is good for stocks. This Quad II is especially strong and should last at least a few more months. We expect an especially strong recovery in the economy, which I explain in Larry’s Thoughts this week.
The concern going forward is what the market will do after all the anticipated growth starts to slow. Remember, stock market investors are always looking six to twelve months ahead when they buy a stock. By the end of the second quarter or so the projections of rapid earnings growth will probably start to slow. That doesn’t mean earnings growth will start to go negative; it simply means growth won’t be as robust as it appears to be for the next four or six months. Then investors will start to be more cautious. At that point, investors could be less encouraged about buying stocks. That will be the time to worry about the stock market.
Fortunately, the mathematics will tell us what we need to know and we will adjust your portfolios accordingly.
The Biden Boom?
President Biden and his economic advisors keep highlighting the economic crisis Biden inherited. This narrative may only last for another month or two.
Biden took office in January facing one of the worst recessions in modern history. Ten million jobs have been lost since last March. If you include the “gig” economy and independent contractors the number approaches 20 million. The virus shutdowns have all but wrecked the travel and hospitality industries. Plus retailers, small businesses, independent contractors and lower income service industry workers are suffering the most.
The Biden $1.9 trillion for the American Rescue Plan is likely to pass in March. Congress may not approve the full $1.9 trillion but something close to that amount should pass. There will almost certainly be another check to most American families for $1,400 per person and an extension of supplemental unemployment benefits. That would boost the total amount of fiscal stimulus during the last year to nearly $6 trillion. This is by far the most aggressive federal response to a recession since the Great Depression of the 1930s.
If you add in the $1.55 trillion that has been accumulating in people’s savings accounts since March of last year, then the boom will arrive. Many indicators are beginning to foretell a huge surge in economic growth. Hedgeye our data provider predicts an increase in the GDP in the second quarter of +11% which is unheard of in history.
Retail sales surged 5.3% in January which was much more than expected. One factor boosting spending was the $600 stimulus checks that went out to most homes in early January, as part of the late 2020 stimulus bill. Just imagine what a $1,400 check will do. Also, business spending picked up which is not surprising since business confidence recently hit a 17 year high.
The roll out of the Covid vaccinations is another bullish indicator. Biden says ample vaccines could be available for everyone by July, and other health experts think herd immunity could arrive sooner. That should be another foot on the economic accelerator.
The question is whether the Biden rescue plan is going to be too large. By adding another $1.9 trillion to the national debt and injecting it into the economy, it could add too much fuel to the economy, thus driving up inflation which is a big question. Will the economy overheat? Will longer term interest rates rise too much? They already have risen from 0.59% on the ten year Treasury note to 1.34% which is the benchmark for mortgage rates. This could choke off the recovery before everybody has a chance to recover.
The Biden stimulus plan seems certain to happen no matter what. With Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell, plus other heavyweights arguing it’s the best way to improve on the recovery. Remember, the stimulus for the recession of 2008 was too small and it took way too long for the economy to recover.
So by summer the economy could be speeding down the highway with nothing but green lights ahead. Happy days may soon be here again, and after a year of misery, Americans may not care how or why things got better.