One year ago, despite lockdowns, skyrocketing unemployment, and major market volatility, my team at Keen Wealth was cautiously optimistic. We believed that most of the economic disruption our country was facing was a temporary and necessary response to battling COVID-19. And we believed that once vaccine development started progressing and the country started reopening, jobs would come back, the economy would roar to life, and the markets would respond in kind.
So far, 2021 has exceeded our expectations. But the latest jobs report and other key economic indicators show that we still have a ways to go before we’ve fully recovered from the pandemic.
On today’s episode, Keen Wealth’s Chief Investment Officer, Matt Wilson, discusses the data he presented in his most recent Market Update Webinar, as well as factors that could potentially slow down our economic momentum.
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1. A strong start to 2021.
At the beginning of Q1 2021, analysts predicted that the mix of vaccinations, reopenings, and government stimulus packages would help S&P 500 earnings to grow by about 24%. Instead, reports at the end of April showed that S&P 500 earnings were up 33.8% in the first quarter. The markets reacted favorably to those higher-than-expected earnings and continued support from the Federal Reserve.
On the COVID-19 front, there’s been some worry lately that vaccination demand is dropping, which could hurt our chances of reaching herd immunity soon. But approximately 43% of the population has received one vaccine dose and 27% are fully vaccinated, figures which have only gone up in the days since we recorded this episode. Add in people with natural antibodies and folks who have recovered from COVID-19 infections and we’re still making good progress in stamping out the virus.
2. What could slow us down?
Based on what we saw in Q1 and where things are trending as we head into the second half of the year, we expect the markets to remain strong. That doesn’t mean growth will be uninterrupted or that we won’t experience volatility. And there are some external factors that folks should be keeping an eye on.
First, President Biden has proposed paying for his ambitious physical and social infrastructure plans by raising taxes on corporations and high-earners. Wall Street greeted this news with one of the rare bumps we’ve seen in the markets this year. You can listen to our discussion on President Biden’s tax proposals for more info, but remember that, at this point, they’re still just proposals. While it’s likely that some taxes are going up this year, there are enough skeptical Democrats in the Senate that it’s likely those increases won’t be as high as proposed.
Another potential hurdle we’re watching is the labor market. Analysts were predicting that last week’s report from the Bureau of Labor Statistics would show nearly 1 million new jobs added in April. Instead, the number was 266,000. This dovetails with reports from nearly every industry that employers are having a really hard time filling open positions. Some analysts believe that extended unemployment benefits from the latest round of stimulus packages are disincentivizing folks from going back to work. Lingering pandemic fallout is probably another factor. Many schools and day care centers still aren’t open, which limits childcare options for working parents. Folks with long-term medical conditions might still be nervous about leaving their bubbles. And many others are still sorting out where and how they want to work post-pandemic – including thoughts of early retirement.
Speaking of stimulus packages, whatever your personal feelings might be about the government’s response to COVID-19, the fact is we’re up to $5 trillion in spending since the pandemic hit – five times what the government spent to stabilize the economy after the Great Recession of 2008. As proposed, the costs of President Biden’s infrastructure plans could reach another $4 trillion. So even if those plans are scaled back by Congress, we’re staring at some eye-watering numbers right now. And while I do think talk of 1970s-style hyperinflation is a bit overblown, it is possible that continued government spending and some of the other factors we’ve discussed today might cause the Federal Reserve to rethink its current policies.
3. What should you do?
I understand that folks have strong feelings about issues like government spending and tax policy. But the worst thing you could do right now is let your feelings about particular proposals influence how you approach your financial planning. We’re hopeful that the positive gains we’ve seen so far this year are going to continue. And if there are any significant developments on fiscal policy that could impact our clients’ plans, we’ll be sure to follow up on a future episode.
For now, if you’d like a bit more detail on the current state of the markets, I encourage you to head over to Keen on Retirement and watch Matt’s entire webinar, which includes visual aids that help to illustrate the topics we’re talking about today. If you’re not already on our mailing list, you can also sign up so that you’ll be notified when Matt delivers his presentation for Q3.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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