“The U.S. economy’s 4% fourth-quarter increase wasn’t enough to ward off a full-year contraction from the pandemic’s initial shock, but growth is expected in 2021,” WSJ writes.
The Bottom Line: U.S. GDP improved to a 4.0% annualized rate through Q4, according to WSJ. It joins a “record gain in the third quarter to further reduce losses from earlier in the pandemic.”
But Wait A Minute: In total, the U.S. contracted by 3.5% in 2020 (measured year-over-year). It’s the first drop since the financial crisis and the biggest since 1946.
- All in all, it’s a 2.5% economic contraction measured from the fourth quarter to the same quarter a year ago.
Holding Out For Optimism: “While the recovery has slowed this winter, economists expect it will pick up again later in 2021, once the pandemic is under control, though the coronavirus remains a threat to the global economy.”
On The Subject Of This Year: According to data from the International Money Fund, the U.S. economy is projected to grow 5.1% this year. Economists surveyed by WSJ provided a more conservative estimate of 4.3% (measured from the fourth quarter of the prior year).
- A lot hinges on the efficacy and distribution of Covid-19 vaccines and whether accumulated savings from the pandemic filters back into the economy.
The S&P 500 is up 13% and the NASDAQ is up 37% from pre-pandemic levels, yet it clearly is not from fundamentals because the base economy still hasn’t recovered from the pandemic.
The market is “looking through” to growth in 2022 and 2023, but that implies valuation increases across the board.
Why are we here?
- There are increased retail volumes driven by stay-at-home and stimulus checks.
- Increased money printing and stimulus spending is potentially decreasing the value of the US Dollar compared to financial assets.
- Low interest rates have driven up valuations of all financial assets, and the value of growth stocks especially.
- There is clearly euphoria in the market in certain names, ranging from $ZM to $GME.
There are many reasons why the party will continue in 2021, but there are also equally as many reasons why we might expect a crash in the future. When we do see a crash, you can be sure that it will hit the frothiest names with the highest fundamental valuations the hardest.