Most Important Number of the Week Is 4.9%
(Bloomberg Opinion) -- As weeks go, this past one could hardly have gone better for the economy. From retail sales to industrial production and the number of homes sold, any data point of consequence easily topped estimates. This was no fluke; Bloomberg’s monthly survey of economists’ forecasts showed that the economy is expected to expand 4.9% this year, which would be the most since Ronald Reagan occupied the White House in 1984. It has sparked talk of another “Roaring ’20s” era. Some esteemed Wall Street firms such as Goldman Sachs Group Inc. say the rate of growth is likely to be even higher — more than 6%.
And yet the stock and corporate debt markets struggled, with the S&P 500 Index dipping 0.71% for the week and the Bloomberg Barclays U.S. Corporate High Yield Bond Index failing to advance. This also was no fluke. Although the performance of equities and other riskier assets tends to track the strength or weakness of the economy over the long term, the two often diverge wildly in the short term — as they did last year. So despite what by all indications will likely be the strongest economic growth in almost 40 years, it should be no surprise if 2021 is not all that good to investors.
The reason is that most of the positive news on the economy and, by extension, corporate profits appears to be reflected in equity values following the 75% gain in the benchmark S&P 500 from its pandemic-era low last March. At 23 times this year’s expected earnings, the S&P 500 is trading more in line with the dot-com boom of the late 1990s than the average of just below 18 times since 1990. The price-to-sales ratio is even more worrisome, surging to a record of about three times and exceeding the dot-com high of about 2.25 times. As for corporate debt, the yield on junk bonds rated BB, or one level below investment-grade, fell below 3% this week for the first time ever.
Those metrics show that markets are forward looking. Investors are paying a high price for assets now because they expect the economy and corporate profits to grow into current valuations. And so far, that is happening, with analysts steadily boosting their S&P 500 earnings estimates for 2021 to about $171 from just under $140 at the beginning of the year, according to data compiled by Bloomberg. And why shouldn’t they be optimistic? Bloomberg News reports that more than 14% of the companies in the S&P 500 have reported something called “triple beats,” which means they topped sales and profit estimates and raised their guidance for the year. That’s the highest percentage in data going back more than two decades.
And yet those whose job is to predict what will happen to stocks are remarkably cautious. The latest Bloomberg News survey of strategists finds that they expect the S&P 500 to end the year at 4,100, an advance of only about 4.8% from Friday’s close of 3,906.71.
There’s no reason to expect the strong economic data to slow down anytime soon. Vaccine distributions are poised to accelerate, and Majority Leader Chuck Schumer said Friday that the Senate is on track to pass the Biden administration’s $1.9 trillion relief plan before March 13. If passed, the money would provide further fuel for an economy sitting on what Bloomberg Economics estimates is around $1.5 trillion in excess savings — an amount more than double the average annual increase in gross domestic product during the last expansion and equivalent to the annual GDP of South Korea. As for the Federal Reserve, it sees no reason to pull back on its “powerful support” of the economy by providing cheap money.
It’s no wonder that chief executive officers are more upbeat on the economy than at any time in the past 17 years. The Conference Board measure of CEO confidence jumped to 73 in the first quarter, more than doubling from 34 last year during the height of the pandemic and business shutdowns, Bloomberg News reported. A reading above 50 reflects more positive than negative responses.
“CEOs across industries are planning for life after Covid-19,” Roger Ferguson, vice chairman of the Business Council and trustee of the Conference Board, said in a statement. “If downside risks are avoided, then this optimism will likely translate into higher wages, employment, and capital spending over the next year.”
Strong statements on the strength of the economy like the one from Ferguson are commonplace these days. It’s becoming harder to find anyone who continues to doubt the staying power of the economic rebound from the severe slump experienced in the second and third quarters. But that doesn’t necessarily translate into a booming year for the stock market — as 1984 shows. Back then, the S&P 500 inched higher by just 1.4% in a roller-coaster year that experienced deep losses and a strong rebound.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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