Back on Track?

In the last twelve months life seemed to run off the rails. Travel, socialization, work, entertainment, shopping, economics, and the stock market all took major deviations from their normal paths. As the COVID vaccination campaign marches forward, and health safety measures are relaxed, the feeling of life finally getting back on track is undeniable. So, how close are the stock market and economy to regaining their pre-COVID vigor?

Well, like a train wreck, COVID made things such a twisted mess that it makes no sense to use typical ways of reading our situation. Before the wreck we would simply measure how fast the train was traveling. Post wreck we have to access damages, lost sales, environmental impacts, time for resumption of normal operations, and so on. All these different perspectives can even lead to seemingly conflicting conclusions on our progress. In a similar fashion, if we want a fair assessment of the economy or stock market, we must now look at things from multiple aspects. Unprecedented times means there are no more simple, one number answers. So let's look at a few different measures.

Economic review: As measured by gross domestic product (GDP) the economy shrank by 3.5% last year. Estimates for the first quarter of this year vary widely, but seem to average around a 5% increase. If accurate, that means within the last month or so our GDP hit pre-pandemic levels. As measured by unemployment, the economy started 2020 at a 3.5% rate, and is currently around a 6.2% rate. Today's rate is not unusual or alarming by historical standards, but it does leave us significantly below were we were. As measured by average household income, last year was a resounding success. Income shot up over 7% largely due to stimulus payments and extra unemployment benefits. As measured by fiscal performance, things are not great. Last year the government spent $6.5 trillion, while only taking in $3.4 trillion, and more spending is forthcoming. Washington appears stuck in stimulus mode amid ongoing concerns the economy remains too weak to thrive on it's own. So to recap, household incomes are speeding along, GDP just got back on track, but employment and fiscal spending are still tangled wrecks.

Stock Market Review: As measured by corporate profits, business is improving. First quarter corporate profits can only be estimated at this time. The midrange of estimates call for profits to come in around 16% below pre-pandemic levels, with an anticipation they will regain their pre-pandemic levels in the second half of this year. As measured by the performance of various stock market sectors, the market is like a train wreck, with various parts going in all different directions at once. Last year the large cap growth category was up significantly while the small cap value category showed slight losses. Judging from action during the first quarter of this year it appears fortunes may have turned with the large cap growth category down slightly and the small cap value category up significantly. Old methods of watching only one index means investors will miss these divergent patterns. So to recap, corporate profits are still under repair, while various stock categories have no unified direction. It's certainly possible that value stocks are now taking on the leadership role I have discussed since last summer. Keep your eyes open, and don't miss the train.

Frank Rizzo, Certified Financial Planner

The opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic and market forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing includes risks, including fluctuating prices and loss of principal. Past performance does not guarantee future results.