What Investors Are Missing About The Economy

The U.S. Economy Is Defying Expectations

Since its March 23 low, the stock market has put on a rollicking rally. Of course, this is less of a rally and more of the market making up for lost ground from a punishing fall in February and March.

Once the severity of the coronavirus pandemic became clear, the stock market plunged. Over the space of about a month, the S&P 500 shed a third of its value—one of the worst bear markets on record. The selling stopped once the Federal Reserve said it would do everything it could to get the economy going.

The Fed’s efforts worked. Since then, the stock market has made an impressive recovery. The index is up more than 50% from its low.

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But now the questions now is: can it continue?

Goldman Sachs thinks it can. The powerful investment house recently raised its target for the S&P 500 from 3,000 to 3,600—that’s a big increase. Goldman isn’t alone; a few other Wall Street strategists have also bumped their forecasts.

Goldman’s David Kostin wrote: “Looking forward, a falling equity risk premium will outweigh a rise in bond yields, and combined with our above-consensus EPS forecast, will lift the S&P 500 Index to 3,600 by year-end.” That’s a fancy way of saying that investors are no longer afraid of the market.

Winning the Expectations Game

To be sure, the point is not that the economy is doing well overall. There are still millions of unemployed and underemployed Americans. Also, many companies have gone under since the lockdown began. Rather, the key point is that the economy may be doing better than expected, and investing is all about expectations gain.

For example, if we look at some recent economic reports, we can also see some tentative signs that the economy is getting better. Last Friday’s retail sales report, for example, showed that Americans are still willing to shop.

For July, retail sales rose by 1.2%. Though this was below estimates of 2.3%, if you exclude automobile sales, retail sales were up 1.9%. That beat estimates of retail-minus-auto sales by 0.7%. This is key because consumer spending drives a large part of the U.S. economy.

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