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Why has the stock market done so well through the first half of 2021?

Why has the stock market done so well through the first half of 2021?

  1. Jobs; 2) Company earning (profits); 3) Consumer spending; 4) Anticipation


According to the Bureau of Labor Statistics, employers added 850,000 jobs in June.  The unemployment rate held steady at 5.9% after peaking at over 14% in April 2020.  In my opinion, this is a good thing.  The pre-pandemic rate was under 4%.  However, there are still 9.5M unemployed persons.  The long-term unemployed, meaning those jobless longer than 27 weeks, is 4M.  This represents 42% of the total unemployed.  This number is 2.9M higher than Feb 2020.  Still a ways to go until this gets good.

During June, 942,000 workers quit their jobs to look for a better job.  This is 164,000 higher than the month before.  So, I guess almost 1M people are pretty confident about getting a better job than they left.  This appears to be a good thing in my opinion.

Open the link, to get to the PDF jobs report from the Bureau of Labor Statistics.  The whole jobs thing is both simple and at the same time complicated. (1)

Consumer spending is up.  Why would it not be?  We were in the middle of a pandemic stay at home order from March 2020 to February 2021.  The only way to spend money was Amazon and take out.  Spending on services, travel, retail, cars, homes are all up from a year ago.  

Month to month, the numbers vary with increases in large ticket items like appliance and furniture (that require up to six months for delivery) selling well while in other months restaurant, airlines, and hotels spending rises.  Sometimes higher prices and shortages frustrate some would-be spenders into not buying now and waiting.  A person I spoke to last week, decided to spend $2,000 to fix her old car and wait a couple years to buy a new one because dealers have such limited inventory. (2)

All of this spending could be due in part to government stimulus checks, “revenge spending” of the money people saved while stuck at home, increased income in some households, confidence that the future will be better, or the vaccine offering people confidence to leave home.

Company earnings (profits) is the driver of stock prices.  Increased earnings indicate a company is more profitable and therefore the stock is more valuable and the price per share goes up.   

In 2006, before the financial crisis, the earnings per share of the 500 companies making up the S&P 500 was $109 per share.  This fell to $19 per share in 2008 in the midst of the Recession due to the Financial Crisis.  Then the long, slow recovery and further growth:  $64 in 2009; $95 in 2010; $116 in 2013; down to $98 during a short recession in 2015; up to $146 in 2019; only to crash due to COVID in 2020 to $97. (3)

For the second quarter of 2021 alone, earnings are projected to be $45 per share.  Some economists are projecting earning to reach $191 per share for calendar 2021.  Open the links 4 and 5 to see a visual that may offer a different perspective and help with your understanding.

The more robust earnings growth can best be seen in the earnings per share projected for year 2021. Three months ago, S&P anticipated that figure would be $154 per share in 2021. Its May 12, 2021 projection indicated the year-end earnings figure will reach $175 per share.  Now, forecasters are talking about the $191 number.  During the last six months, optimism for the economy has grown.

If that outcome is realized, it would put the S&P 500's earnings per share nearly back on the trajectory that Standard & Poor’s projected back in February 2020, before the onset of the coronavirus pandemic recession hammered corporate earnings in the U.S.  In other words, if you looked at the earnings track from 2006 to 2019 to now, it is as if the recessions of 2008 and 2020 never occurred.  Yes, they happened and at the time it was very scary.  However, growth continues.  No guarantees are implied or expressed.  I cannot predict the future. (4,5) Open the links for a visual explanation.   

The stock market is a “leading economic indicator.”  This means the stock market will often (but not always) move in a direction in anticipation of the economy.  The big decline in March of 2020 was in anticipation of the impact COVID was feared to have on the economy.  The increase in the stock market from April 2020 through now was in anticipation of the growth we have seen in the economy since last March and anticipation of a continuing good economy.

But we need to take a reality check.  You may have noticed pockets of increased COVID positive tests, hospitalizations, and deaths again in parts of the US and world.  Cities like Sydney, Australia have implemented hard lock-downs.  The Tokyo Olympics will be held without spectators.   Los Angeles is requiring masks for large indoor gatherings.

If allowed to gain a foothold and gather momentum, the mutating COVID virus, in my opinion, has the potential of slowing or perhaps derailing this economic recovery we are all enjoying so much.  I believe the best thing each and everyone of us can do to protect our near-term financial and physical health is to get a vaccination and wear a mask when out in public and encourage everyone we know to do the same.  Stay safe and help the economy by doing all you can to stay healthy. (6)

Your financial plan is there to help negotiate financial and emotional speed bumps in life.  The financial plan is there to tell us what to do, when to do it, and how to do it when the economy and markets deviate from the growth we expect.  The financial plan is to your finances what the evacuation drill in the event of fire, flash flood, earthquake, tornado, or hurricane is to the physical health of your family.  We are a financial planning firm in San Diego County with an office in Escondido.  We partner with families locally and around the country.  Call us with questions about your financial plan. 

  1. https://www.bls.gov/news.release/pdf/empsit.pdf
  2. https://www.wsj.com/articles/consumer-spending-personal-income-inflation-may-2021-11624563378
  3. https://www.multpl.com/s-p-500-earnings/table/by-year
  4. https://www.bloomberg.com/opinion/articles/2021-07-10/corporate-earnings-45-03-a-share5 estimate-for-s-p-500-is-bullish-for-market
  5. https://seekingalpha.com/article/4429885-spring-2021-snapshot-of-expected-future-s-and-p-500-earnings
  6. https://health.clevelandclinic.org/can-vaccinated-people-transmit-covid-19-to-others/

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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.