Have Stocks Already Priced In The “Economic Boom?”

Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

The reason is that once economic growth reaches higher levels, stocks have climbed to levels incorporating those expectations. In other words, when things are as “good as they can get,” stocks begin to reprice for slower future growth rates.

That is the phase we are at currently.

How Much Pent Up Demand Is There Anyway

The main driver of the expected recovery from a “recessionary” low stems from the question of how much “pent up” demand currently exists?

If we look at durable goods as an example, such would suggest that much of the demand for long-lasting products got pulled forward by consumers over the last 12-months.

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Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

Of course, if we broaden that measure to retails sales which make up ~40% of the personal consumption expenditures (PCE) index, we see much the same.

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Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

Given PCE, which comprises nearly 70% of GDP, has already recovered much of pandemic-related decline, how much “pent up” demand remains.

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Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

However, wage growth outside of personal transfer payments (i.e., stimulus) hasn’t recovered. It is impossible to sustain higher rates of economic growth without wage growth.

Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

Importantly, as we saw in January and February following the $900 billion stimulus bill passage, there was a short-lived surge of activity. However, once individuals spent the money, activity quickly faded. We saw the same with retail sales in April following the American Rescue Plan, which sent out $1400 checks.

Economic Boom, Have Stocks Already Priced In The “Economic Boom?”

After the $1400 checks get spent, what will be the driver for continued consumption at previous rates? Further, given the impact of a larger economy (as it recovers), the rate of change will decline markedly in the months to come.

Earnings Growth Inflection

“Earnings growth has a high correlation to stock market performance, but with time lags that are less well-understood. We are about halfway through the first quarter S&P 500 earnings season and so far, the results are exceptionally strong.” – Liz Ann Sonders

That is correct, and given the high correlation between earnings and market returns, we come back to the same question. Has the advance in the market accounted for the rebound in earnings? More importantly, what happens when that growth reverses?

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