The S&P 500 hit another record this week as a combination of a receding virus, massive stimulus, and low interest rates pushed stocks, and most other assets, higher. Economic data was strong across the board.
Employment has recovered to 152 million, only 4 million below the record high employment in December of 2019. Meanwhile, unemployment has dropped to 6%, still stubbornly high, but job openings rose to 7.37 million and the ratio of unemployed workers to job openings fell to 1.35. That is the lowest level since March of 2021 when unemployment was 4.4%. It appears that there are plenty of jobs available, but unemployment remains elevated. It is possible that there is a skills mismatch between the unemployed and the job openings available, or it is possible that generous unemployment benefits are discouraging workers from going back to work. Likely, the answer is both factors are having an impact in keeping unemployment at 6% despite the 7.37 million in job openings.
The median price for an existing single-family home rose 16.2% year over year to a record high of $317,000. Meanwhile, construction spending on new single-family homes in February was the highest level since October of 2006. Similarly, spending on home improvements hit a record high in January at $248 billion as prices for materials like lumber, steel, and copper have soared. US motor vehicle sales rose to the highest level since July 2005.
Real GDP, a measure of the overall economy, soared 18% (saar) during the second half of 2020 after falling 19.2% in the first half of 2020. It is on track to fully recover in the Q1 or Q2 of this year. While still preliminary, Q1 GDP is expected to grow at a very strong 6.2% during the first quarter of 2021 based on the Atlanta Fed’s GDP Now Model.
All of this good economic news is also good for stocks. First quarter earnings should be released in the coming days and analysts expect Q1 earnings will grow more than 20% compared to Q1 of 2020. 2021 annual earnings growth is expected to be more than 27% compared to 2020.
Of course, with all this good news comes a new list of worries, most notably high stock prices that reflect all this good news. The Price Earnings (PE) Ratio, a measure of stock valuation is hovering around 22, an elevated level compared to the historical 18 average. Also on the worry list is that all this good news will result in inflation and force the Federal Reserve to raise rates sooner than expected. For now, valuation seems appropriate given the expected growth and inflation is rising but still tame. We’ll enjoy the booming economy and will be watching both valuation and inflation for signs of trouble going forward.