April 2021
The economic re-opening is underway and most economists expect strong GDP growth this year.
Everyone knows this.
Have stocks priced in “all the good news?”
I don’t think so, for two reasons. One, I think investors can look forward to a 2022 that’s even better than 2021. Government stimulus money is still filtering into the financial system, and there are significant pockets of pent-up demand like travel, dining and entertainment. That will ripple throughout the broader economy for a year at least.
Two, long term interest rates remain low. The Fed has stated plainly they want to wait until 2023 to begin raising short term rates. More, they are going so far as to “print” money in order to buy long term bonds and keep those long term interest rates low. Together, the signals from the Fed are that they are practically begging you to borrow money and invest it in a project - a house, stocks - in order to goose the economy.
It won’t be easy money forever. Well before they raise rates, they will tell us they’re going to slow or stop printing money and buying bonds. This is a “when” situation, not an “if.” Interest rates will spike higher, stocks will sell off, and you’ll hear the term “taper tantrum.” The taper will be the reduction in buying bonds, and the tantrum will be the reaction in the markets.
That could happen later this year, or after the mid-term elections. For now, people are healthier, have cabin fever and want to get out and spend. That is fantastic for business and the stock market. Let’s let our stocks ride and understand that the upside is greater than the bumps along the way.
Chip