The First Quarter of 2021 Was a Heck of a Year!

Just when it felt like the stock market and rebounding economy were finally ready to take a pitstop to grab a snack, waves of good news flooded their engines with rocket fuel this year. The departing and incoming Governments passed 2 massive stimulus bills totaling almost $3 Trillion in recent months. The Fed promised to keep flooding the markets with $40 Billion/month liquidity. Warp Speed Covid vaccine production ramped up to more than 3 million doses a day. Most of the 95% of the labor force with jobs received free stimulus checks. Even the 6% unemployed are being paid more than if they returned to work. Consumers, with almost $3 Trillion in above normal savings, have ordered Pelotons like stocking stuffers and have been packing the Florida beaches since February to escape the restrictive confines of their hometown Covid curmudgeons. Even with Covid restrictions, the manufacturing and much larger service sector are expanding at record rates, creating labor shortages and record supply chain bottlenecks. Is it any surprise that stocks in general had nowhere to go but up, even if many sectors are overvalued by normal benchmarks? In spite of material and product shortfalls, surging shipping activity is apparently nation wide and not just the 5 fold increase in delivery trucks we see daily in our neighborhood. Demand for trucks and drivers are back to the extremes of 2017 – 2018 and rail traffic has been tracking normal 2019 levels for the past 7 months. It feels as if a whole year of robust growth has already arrived in Q1 this year.

ISM and Markit are both reporting that Purchasing Managers (PMI) in both the service and manufacturing sectors are hitting record levels of growth and optimism despite a partially closed economy. The US economy is firing on all cylinders as virus restrictions fade, a successful vaccine roll-out and stimulus measures all continue to accelerate demand and overwhelm the supply chain. The record manufacturing rebound is impressive since factories continue to be severely capacity restrained by unprecedented supply chain delays and labor shortages. The consequence is record same store sales growth, but an even steeper rise for input prices. Year over year inflation and wage growth have popped, but the markets appear to be siding with Fed Chair Powell’s labeling this price hike as transitory, since interest rates have been falling for the past 4 weeks. 

Supply shortfalls are driving a sharp rise in backlogs of uncompleted work as companies struggle to boost operating capacity. The good news is that backlogs and restocking will extend the strong expansion phase of this economic cycle well into 2022. Customer inventories to restock shelves are at record lows today and typically require a couple years of ramping up by suppliers and manufacturers to approach a supply and demand balance. The fact that Uber and Lyft are spending over $300 Million to acquire more drivers who can now earn as much as $25 to $40 an hour is a sign of how hard it will be for old line industries to compete for labor to satisfy surging demand.

We have all heard or experienced the almost uncontrollable itch to get out and travel this year. Tracking apps in 2020 revealed a record level of outdoor activity centered around hiking and biking. This year the itch has spread to our cars and hitting the open road.  There will be quite a few trips to see Family, the nations Parks and vacation spots this summer. While air travel is still down 40% from 2019, the 2nd half of 2021 bookings for flying and cruise ships are very strong. As long as new viruses are effectively quelled, we may see 4 or 5 quarters of elevated travel beginning this summer. 

The stock market is a forward looking perspective on our economy and has correctly foretold the rapid return to normal economic health recently, far faster than any economist expected last year. This also means that at some point stocks will slow their ascent and even decline while the economy keeps firing on all cylinders for the next year or two. Stocks will have some heart pounding corrections as economic momentum peaks and mobility restrictions are almost completely lifted in Q3. The Q2 equity correction we have talked about for months to begin in May could still be a single digit (%) affair until consumers are allowed to travel, socialize and spend down their record high savings accounts. Far deeper double digit drops are more likely once consumers have had a chance, post Covid, to transform back toward their normal unhealthy selves, packing indoor restaurants, casinos, planes and cruise ships in the 2nd half of 2021.

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