June 30, 2021 – CFS Viewpoint – Economic Rebound Edition
Economic data is pointing to accelerating growth, while the rise in inflation looks narrow and likely to be short-lived;
- Recent data confirms that rises in prices have been confined to a few key items, notably energy and other raw materials. The May increase in European inflation was driven mainly by a 13.1% year-over-year rise in energy prices, while core inflation, which generally excludes volatile food and energy, rose only from 0.8% to 0.9% in the month.
- While there are media reports of bottlenecks for some items, the strong level of consumer spending shows that most goods are flowing along their supply chains. We agree with the recent comments from the Federal Reserve that such bottlenecks will clear as businesses adapt to a reopening economy. Meanwhile, indicators of growth remained positive, including the 559,000 jobs created by the US economy in May, up from 278,000 in the prior month and only modestly below the consensus forecast.
The recovery in global earnings is in full swing;
- The recent first quarter corporate earnings season was the best in at least a decade, driving large upgrades to earnings forecasts. We hear expectations for global earnings to grow 38% this year (previously 31%). US and Eurozone earnings forecasts for 2021 are now in the range of 40% and 50%, respectively.
- Although equities have already performed well over the past year, this faster-than-anticipated earnings recovery supports further gains to markets, in our view. We also see Japan as being a major beneficiary from the global economic rebound, and we expect 40% earnings growth there.
Policymakers—both fiscal and monetary—seem willing to let economies run hot;
- Federal Reserve officials recently noted that inflation averaged less than 2% over the past quarter-century, and that statistical measures of trend inflation ran consistently below 2% for decades before the pandemic. It is widely expected that they will not raise interest rates quickly and allow some inflation to take hold. Modest inflation helps the earnings power of many publicly traded stocks. When it comes to investors expectations for stock gains we must continue to see rising profits.
- Meanwhile, government policy has prevented business failures and boosted private savings, allowing economies to bounce back early and aggressively. The European Union is delivering a boost of as much as 800 billion Euros over the next five years, with several individual countries including France and Italy adding additional stimulus. DC politicians continue to negotiate over a USD 1.7 trillion infrastructure package, and recent reports suggest they might settle on a more modest practical deal with (hopefully) smaller increases in corporate and capital taxes than originally planned. Higher corporate taxes will dampen stock market returns if they get passed.
So, while we will remain alert for risks, including evidence of a more sustained rise in inflation, we see the economic and policy backdrop as positive for businesses growing and higher profits which is the only thing that supports higher stock prices. The greatest upside to come from cyclical parts of the market, including energy and financials materials & industrial businesses, along with many technology sectors as work from home has accelerated cloud computing, cyber security, advanced cellular systems, biotech, and certain “green” energy initiatives.
As always, we believe the greatest risks to our investment portfolios are trying to time the market based on news headlines or politics or pending potential events which may or may not occur. And broadly speaking we cannot let fear of temporary fluctuation and short-term market drops interfere with our long-term investment decisions. Our responsibility is to continue to monitor the economic environment so that we may make educated decisions on how best to put your investments to work. We very much appreciate the trust you, our clients, have placed in us and please know that we are always available to meet or speak with you at any time.
As usual this commentary is based solely the opinions of Brian Cassidy, Arnie Magid and Daniel Kelly. Nothing in the above written material is endorsed by, or written by, or provided by Cambridge Investment Research, Inc., or by any other outside party or firm.
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