The S&P 500 has reached a new high on 31% of trading days year to date—the highest annual rate on record, and is up 21% so far in 2021.
Given these strong returns, we are often asked what could cause the market to move higher from here. While the resurgent virus has caused a near-term headwind, we see key factors that keep us optimistic on our economic and market outlook.
Consumer spending accounts for the majority of economic activity and a healthy consumer is critical for economic growth and stock market gains. Following the housing bubble-fueled spending spree that culminated with the 2008 financial crisis, consumers spent much of the last economic cycle deleveraging, which resulted in muted economic growth. In contrast, consumers are starting this expansion with low debt levels and massive pent-up savings—important tailwinds for a long and healthy consumer spending cycle.
Importantly, consumer balance sheets are the healthiest they’ve been in decades, with savings up sharply, while the overall household debt service ratio has fallen to a record low, with steep declines in both consumer credit and mortgages. Core income growth (jobs x wages) is also healthy while there are 10.1 million job openings which suggests further gains ahead. Savings are $0.6 trillion higher than pre-COVID and liquid assets (which includes uninvested savings) are $3.9 trillion above pre-COVID levels. This provides a bright outlook for consumer spending, especially considering the significant pent-up demand caused by the pandemic.
Banks Eager to Lend
In contrast to the aftermath of the 2008 financial crisis, banks are very healthy today with strong balance sheets. This puts them in good position to lend with their willingness to make loans at a historically high level today. The ability to make loans is a key catalyst for economic activity.
Last Thursday’s GDP report showed domestic corporate profits are now 21% above their 2019 peak. This puts companies in good position to make investments for future growth, pay employees more and hire new employees (exemplified by the 10.1 million job openings). This provides significant support for further economic growth. It also allows companies to make the needed investments for enhancing productivity which is the critical ingredient for raising living standards.
Accommodative Federal Reserve
Ever since the start of the pandemic, the Federal Reserve has pursued an extremely accommodative monetary policy of zero interest rates and purchases of Treasury and mortgage backed securities of $120 billion per month. While the Delta variant provides some near-term uncertainty, Fed Chairman Powell suggested to the virtual Jackson Hole conference that the central bank might begin to reduce its bond-buying program by year-end, but was in no rush to raise interest rates. Stocks rallied on Friday after his reassuring comments.
Technical Remain Encouraging
Stocks and other assets send important signals through their price changes. As concerns about the Delta variant rose earlier this summer, highly cyclical stocks underperformed, while Treasury bond yields fell, signaling a weaker outlook for economic performance. However, important price support levels are holding in the U.S., Europe, and Japan.
While the S&P 500 continues to make new highs, the MSCI All Country World Index (ACWI), ACWI ex-U.S., and EAFE indexes all remain above critical support levels. There are also early signs that the 10-year Treasury and German Bund yields are bottoming and high yield spreads (difference between high yield bond yields and Treasury yields) are leveling out. Crude oil prices have also stabilized. All of this suggests the recovery remains intact, despite concerns over the resurgent virus.
Important Readings This Week
The beginning of every month brings important readings on economic activity from business surveys and the labor market. The ISM releases its Manufacturing Purchasing Managers’ Index for August on Wednesday and releases its Services Purchasing Managers Index on Friday. These business surveys provide an important, timely reading on economic activity. On Friday, the Bureau of Labor Statistics publishes the jobs report for August. Given the 10.1 million job openings, we expect further improvement in the labor market.
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