Can the Recovery Keep Going?
The S&P 500 hit record highs an astonishing 33 times in the first six months of 2021 as the US and the world reopen and return to something approximating normal. As the markets climb, so does fear that the tremendous rally is sustainable. After all of the events of the last 15 months, how could stocks still be hitting record highs?
Real Economic Activity
While such fear is understandable, the good news is that data suggests the market highs are driven not by speculation but rather real increases in economic activity. When you invest in a stock, you are investing in a claim on the future earnings of that company, and as a result, that company’s earnings are closely correlated to the stock performance. As the economy reopens, real economic activity is driving an increase in corporate earnings, which in turn is reflected in higher stock prices.
Last year, corporate earnings cratered in the face of mandated lockdowns and incredible uncertainty surrounding the global pandemic. As shown below, since the depths of the pandemic last summer, earnings per share (EPS) have been steadily rising and more than made up for the losses of last year.
Return to Normalcy
This growth in corporate earnings is not the result of fancy accounting. Economic activity is truly rising as vaccinations increase and COVID cases decline. While the world will likely never fully return to its pre-pandemic normal, familiar patterns are reemerging. As we head into peak summer vacation time, data suggests people are getting back out there.
This return to normalcy is not limited to just travel and entertainment. After the massive supply disruptions from lockdowns and breakdowns in global trade during the thick of the pandemic pushed industrial capacity and production sharply down, both have rebounded as companies aim to meet pent-up demand.
While one can never predict markets with certainty, there is clear reason to believe that the market highs we have seen are driven by real economic reasons as the pandemic loosens its grip, and we all hope to return to a new normal.
Jonathan is a Wealth Manager at BDF and Director of Research. His focus on building strong relationships with clients and the intellectual challenges of the financial markets drew him to wealth management. Putting these two aspects together to provide holistic solutions to clients and help them achieve the goals they have set out to meet is what drives him every day.