Pro Perspectives 4/19/21

April 19, 2021

On Friday we took another look at the lost decade(+) for stocks.  Despite the more than six-fold move in the S&P 500 from the bottom in 2009, the benchmark stock index has, still, yet to return to the path projected by its long-term growth rate. 

If we compounded an 8% return from the 2007 pre-Great Recession peak, we would be 10% higher than current levels.  And by mid-year 2022, the S&P 500 would close in on 5,000.  That's 20% higher than current levels. 

The good news, the gap between the post-financial crisis trajectory, and the long-run growth trajectory is closing.  And it's closing because, unlike the post-financial crisis decade, we are finally going to get some huge economic growth to compensate for a deep recession.  That's how recoveries historically work: economic contraction, followed by big (above-trend) growth.  In this case, we are throwing trillions and trillions of dollars of fiscal stimulus at it.  So we will get the big growth. 

Here is a look at what the six years were like following the Great Depression … 

At this point, the projections for 2021 growth are running around 7%.  Given the scale of the government spending, my bet is that it will be bigger (maybe much bigger).

We will get clues on just how underestimated growth is, as we continue to step through Q1 earnings.  At this point, with just about a tenth of companies reported, earnings growth is at 30%, and 84% of companies are beating estimates.  Expect more of it.  And when we get to Q2, the earnings numbers will be far, far bigger, as we compare to an ultra-low base of Q2 of last year (when the economy was mostly shutdown).  

So we have the recipe for a big bounce back in growth.  That is being reflected in stocks, and that will continue.  But after we clear the next year or so, it will be a matter of how much of the growth is being eaten by inflation.  We will see.