By Judy Loy
Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc.
With pandemic lockdowns and quarantines closing restaurants, restricting travel and hurting traditional retail, 2020 was dark for the economy. (That two-week quarantine seemed to last forever…) The stock market took notice and dropped rapidly in March 2020, but it did not last long. The rebound came quickly and the S&P 500 (an index consisting of 500 large U.S. companies listed on stock exchanges) ended the year with a 15.76% return. So far in 2021 (as of the close 4/1), the index returned 8.67%.
When U.S. unemployment hit 14.7% in April 2020, the market began its climb upward. Are stocks that disconnected from reality? The first thing you need to know is stocks are forward looking. Stocks are a leading indicator, which means it corresponds with future movements or changes in business and the economy. Therefore, the stock market will react favorably before the economy improves. Another leading indicator, which is heating up, is manufacturing. March 2021 brought the strongest manufacturing growth since 1983.
The latest jobs report released on Good Friday showed a hiring surge. U.S. employers added 916,000 jobs in March 2021. The unemployment rate declined to 6%. The estimate for job growth was for 675,000 jobs added in March. January and February numbers were revised up.
The news is not just positive for the United States. The International Monetary Fund predicts the 2021 global economy will expand at the fastest pace in 40 years. The United States and China will lead the way with 6.4% and 8.4% projected growth. In many developing countries, the news is not as positive. Many emerging markets will only have 28% of their populations vaccinated by year-end, compared to a 72% vaccination for developed countries. Thus, vaccinations are highlighting inequality across the globe.
The Federal Reserve sets bank borrowing rates and helps spur or slow the U.S. economy. At its last meeting, Fed officials saw a brighter outlook for the economy. Even with this outlook, the Fed says it is committed to rates near zero through 2023 and continues to buy bonds. In this manner, the Federal Reserve is still supporting the economy and not set to derail the positive path.
Finally, Jamie Dimon, the CEO of JP Morgan Chase, the biggest U.S. bank, released his annual letter to shareholders on Wednesday. The tone was very upbeat as the business leader anticipates an economic “Goldilocks moment” through 2023. A Goldilocks economy is not too hot or too cold and allows for steady growth, economic stability and full employment but not too hot to cause high inflation. Dimon’s case for the “perfect economy” are strong consumer savings, vaccine distribution and President Joe Biden’s proposed $2.3 trillion infrastructure plan.
All this incredibly positive news is the reason the U.S. stock markets are in a positive state. Do not forget: they are forward looking so they will send the warning signal before we see the trouble or downturn in the economy, which is why it is so hard to predict market movements.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions.
