An old Wall Street joke: The stock market has predicted ten of the last two recessions.
The stock market is a leading indicator of economic activity. Like any indicator, it is imperfect, but this time the stock market got it right. Rising stock prices have been predicting that economic progress would be strong and exceed expectations. Many investors have not believed this forecast, feeling market levels were not justified by fundamentals. That view has been proven incorrect. At the beginning of the year, the 2021 earnings forecast for the S&P 500 Stock Index was $167.24. The current forecast for the year is $191.22, an increase of 14.3%. Unemployment peaked in April 2020 at 14.1%. Unemployment at the end of June was estimated at 5.9%. A very strong showing for the economy. In general, stock prices have moved higher, tracking earnings.
Strong earnings and investor optimism have led to most stocks being valued toward the high end of historical price ranges. If earnings continue to rise at a faster rate than expected current valuations will be justified. We will have to wait and see how this plays out.
Many investors and analysts are looking at current strong economic data and forecasting continued strong stock market performance. We may see a continued market uptrend, but looking at current data to forecast a leading indicator does not seem make much sense.
For our part, we will continue to monitor valuations of individual stocks looking for opportunity. Fixed income yields remain low and unattractive. We will maintain positions in fixed income to balance risk, while keeping maturities short.
As always, I welcome your comments or questions.
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