The resurgence of the US economy is well underway as US GDP grew 6.4% for the first quarter. With more vaccinations and another round of stimulus, consumer spending surged 10.7%. Also, ICYMI, the housing market is red hot, driving personal investments in housing up 11%. The optimism of reopening also helped businesses ramp up normalized spending as well and investments from businesses jumped up 10%. I’ve mentioned supply chain hiccups holding back industrial production, and we saw that flow through into inventory levels, which fell nearly $148b because production couldn’t keep up with demand. Had that not happened, GDP would have actually grown closer to 9%. All this demand is, as expected, pushing inflation higher – the Fed’s preferred inflation index, the PCE, increased 2.3% in March. Remember the Fed’s target is an average 2% inflation.
Moral of the story: All things are pointing to the economic recovery continuing at a great pace through the year. At this point, 43% of the population (55% of all adults) have gotten at least one COVID vaccine and the weather is starting to improve meaningfully, which means we should start seeing reopenings in a big way (NYC is opening fully by July 1). As much as the stimulus checks have helped support consumer spending, most of the money has yet to be spent, which means more spending is coming. Economists are expecting growth in the second quarter to be above 8%, which seems reasonable if we continue down our current path of recovery.
First 100 days
Biden addressed Congress this week after his first 100 days in office, and his speech underscored a lot of the administration’s core values. He also outlined his future priorities from a policy perspective – basically lots of big government spending on infrastructure, child care, education, all being paid for by additional taxes on the wealthy. Biden pointed to the gap between CEOs and their workers is the largest it’s ever been; while millions lost their jobs during COVID, 650 billionaires increased their net worth by $1 trillion. You can see how that stat would get people fired up. His plans to raise corporate taxes and capital gains taxes are obviously aggressively opposed by the Republicans but also by some Democrats.
Moral of the story: I’m all for more tax equality – I pay my whole share of taxes and I think I might pay more taxes than some of the wealthiest people who have the ability to pay for tax professionals who can work the loopholes in the system to protect their incomes. But instead of just raising taxes, I’d rather have the loopholes fixed first. Anywho, the administration is pushing for a lot of this agenda to make it through Congress before midterm elections while the Democrats still control the majority in Congress. Given the tax plans have some opposition from Democrats, I’d assume there would be a more muted version of the current plan that actually comes to fruition.
Earnings so far
About 75% of companies have reported earnings so far and I’m v excited about seeing the light at the end of the tunnel, this has been a *rough* week. About 69% of companies who have reported results have exceeded expectations, which is well above the historical norm of about 48%. More impressive is that the average beat on estimates has been about 20%, which is over three times higher than usual. Companies fueled by consume spending (Amazon, Comcast, Apple, Microsoft, Alphabet) all reported incredible revenue growth for the quarter, which checks out given what we saw of consumer spending in the first quarter.
Moral of the story: Despite incredible earnings results, stocks aren’t really getting much of a boost as the theme from last week continues – expectations have been just too high coming into this earnings season and all of this optimism is already priced into the market. Which just makes me nervous about big corrections upcoming if the economy steps a toe out of line.