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Money Printer Go Brr

Earnings season is underway with many of the largest companies reporting in the coming weeks.  If the companies that reported this week are any indication, there is a lot of good news to come.  Whether we chalk it up to easy year-over-year comparisons, or pent up consumer demand, revenue growth has been impressive across the board.  With that said, there was one minor wrinkle this week in the form of a proposed capital gains tax hike which threw the markets into a temporary tizzy.  Fortunately, the markets recovered as investors factored in both the probability of such a tax hike as well as its potential impact.  At the end of the day, investors shrugged it off. For now.

To be clear, we expect economic growth this year to be off the charts.  We are not alone in thinking federal stimulus, the reopening of the economy, and pent up consumer demand will all drive the economy faster and higher than any time in recent history.  However, this fiscal and monetary fueled spending binge will not last forever.  In fact, Goldman Sachs believes growth will peak this quarter at 7.5% and slowly taper off with each subsequent quarter.  By the end of the year they anticipate growth will be back to 1.5% going forward.  I mention this just to prepare everyone that the party we’re about to experience will be exhilarating, but economic growth will quickly return to “normal” in just a matter of one or two quarters.  I don’t know about you, but on the heels of the past year, normal sounds pretty good to me.

As for the economic indicators, they remain strong and growing stronger.  As with last week, jobless claims fell further to 547,000, which marks a 13-month low basically putting us back to the beginning of the pandemic.  If this trend continues, we might see the unemployment rate fall faster than even we anticipate.  While I don’t often cite economic indicators because most are backwards looking, there is one that attempts to forecast future conditions and is worth considering.  Perhaps the name gives it away, but the Leading Economic Index looks at ten key variables and expected future conditions to give us an indication of where things are going.  This index rose sharply in March and is consistent with the economy picking up in the months ahead.

I’d be remiss if I didn’t also point out that as the economy quickly grows, so too will inflation.  Last week we learned the Consumer Price Index (CPI) experienced the largest monthly rise since 2012.  Among those companies announcing price hikes are Procter & Gamble and Coca Cola who state commodity and input costs are rising rapidly.  Many companies have hedged costs for 2021, but are not prepared for next year.  Rising labor costs are also an issue for many companies competing for employees in what is shaping up to be a very tight labor market.  As I’ve stated before, the Fed anticipates inflation to rise quickly above 2%, alongside economic growth.  But it also expects inflation to moderate as that economic growth slows going into next year.  While there clearly is a relationship between economic growth and inflation, I am not as confident they will necessarily move in lockstep given the nature of our current recovery.

In closing, I finding it fitting to bring you this story of the week.  We all recognize there has been an unprecedented amount of money, both fiscal and monetary, pumped into the economy.   However, it didn’t hit home for me until I came across this one article.  Dan Morehead, CEO of Pantera Capital, mentioned in his letter to investors that, “The United States printed more money in June (of last year) than in the first two centuries after its founding.  Last month, the budget deficit - $864 million – was larger than the total debt incurred from 1776 through the end of 1979.”  Let that sink in for a minute.  It is sobering to think just how much money it has taken to keep our economy afloat during this time.  Now you know.

Bruce J. Mason, MBA