Unlike typical recessions, this one was not born of financial factors but rather was the result of what was effectively a natural disaster. Economic activity was interrupted but much of the underlying demand for goods and services remained essentially intact. As highlighted in last month’s Investment Comments, the unique nature of this economic slowdown, and subsequent rebound, make parsing the data particularly difficult. When pandemic restrictions initially hit the economy, there were concerns it would take years for workers and businesses to heal. However, in the current quarter the size of the economy is now anticipated to surpass pre-pandemic levels and by year end GDP is expected to achieve its pre-pandemic path, if not exceed it.
According to the CDC. nearly 65% of U.S. adults have received at least one vaccination, and state and local governments continue to ease restrictions on businesses. Consumer balance sheets remain in good shape, aided by stimulus payments. Given a strong start to 2021, the National Retail Federation recently revised higher its expectation for retail sales this year, now anticipating an increase of 10.5%-13.5% versus its February forecast of 6.5%-8.2% growth. As consumers venture out, categories such as beauty products have done well, as has spending on restaurants, lodging, and airlines. The Census Bureau announced May retail sales below expectations, down 1.3% from April, but up 24.4% versus a year ago.
Job gains have not kept pace with the economy but there has been progress. Total employment remains about 7.6 million jobs shy of pre-pandemic levels. Jobless claims have been on a downward trajectory. Recent weekly unemployment claims have fallen below 400,000, achieving their lowest level since the pandemic began. While the trend is positive, claims remain well above pre-pandemic filings of slightly over 200,000. Employers added 559,000 jobs in May, led by leisure and hospitality. This was below expectations, though up from a revised 278,000 for April. The unemployment rate declined to 5.8% from 6.1% versus approximately 4% before the pandemic. The market welcomed the slightly softer-than-expected results as investors felt the report was not enough to pull forward Federal Reserve action to begin the process of removing monetary accommodation.
A record level of job openings in the U.S. suggests businesses continue to struggle to fill positions as potential workers remain on the sidelines. Many have attributed this to worker concerns about contracting the virus, child-care responsibilities preventing some parents from returning to work, and a $300-per-week federal supplement for those receiving unemployment benefits. The magnitude of the impact of each of these factors remains uncertain, though each is likely to ease over the coming months.
Low interest rates continue to support elevated P/E ratios. The forward P/E ratio for the S&P 500 is approximately 21x. Earnings are expected to grow approximately 35% in 2021 and low-double digits in 2022. The positive news is earnings estimates for 2021 have increased since the start of the year, the opposite of the more typical trajectory of reduced estimates as the year progresses, and serves as yet another sign of the rebounding economy. The timing with which the Fed chooses to act remains a risk but owning pieces of reasonably valued, growing companies remains a good way to participate in this rebound.
Reprinted from the July 2021 issue of the Investor Advisory Service. For more information, to download a sample issue, or to subscribe to the best investing newsletter in the U.S., visit Investor Advisory Service.