What's Driving the Current Economic Recovery - July 2021
Today on Market Vizion, I want to give you my rationale for why I am optimistic about the state of the economy. We're not calling for shoot the moon returns, but we're also not seeing the kinds of crisis or crashes that some people are predicting out there. Here's a few factors it comes down to.
GDP Recovery Surpasses Expectations
GDP recovery is huge. Historically, when there has been a substantial hit to the economy and GDP falls off, it takes an average of 28 months for GDP to get back to pre-crisis production levels. Some crises obviously have taken much longer, but the average is about two and a half years.
This time, we're back to not just zero. We're back to trendline growth with GDP within 15 months. That is huge, and it is incredibly rapid. It's why we're seeing some of the inflationary pressures we talked about a lot.
Now, I see a number of other things that are very encouraging in the economy.
Remote Work Drives Massive Productivity Surge
Remote working is going to create massive productivity increases throughout our economy. We're taking a lot of white collar workers, and we're giving them back hundreds of hours a year that they had been spending commuting.
We've all embraced video communication, much more so than we had a year or two ago. That remote working model is going to cause substantial productivity increases in our economy and productivity increases drive GDP growth.
COVID Reactivity Favors Big Business
Next, let's talk about small businesses versus big businesses. A lot of folks are concerned about small businesses being the backbone of the American economy. That is true, although we're a much more service oriented economy today than we have been in previous generations.
The reality is we know that GDP growth is back at GDP demand. Economic growth is back in a big, big way, but where is that money getting spent?
While a lot of small mom and pop shops have closed during COVID, the economic demand is still there. The question is where is the dollar getting spent?
The answer is it's getting spent with bigger companies that survived COVID and are now back in a big way. And they have cannibalized demand coming through COVID as small businesses closed.
While you and I may not be able to go to the mom and pop restaurant down the street that closed, we can go to Chipotle. From an investor perspective, you and I never could own stock in mom and pop restaurant down the road, but we can buy stock in Chipotle. (This isn't an investment recommendation.)
The fact of the matter is the economic balloon has gotten squeezed in favor of big companies. And those big companies have stocks that we can participate in. That's a big reason why we're seeing this stock market boom.
Inflation Muddies the Water for Trends
The last thing I'll point out here is this issue of inflation. Everybody's terrified of inflation because they remember runaway inflation under Jimmy Carter. This is not the 1970s all over again. Interest rates are being kept very, very low. Some would even say artificially low by the Fed.
Here's the issue with inflation. Inflation pushes asset prices up. And here's the secret, stocks are assets. When inflation pushes asset prices up, it's also going to bolster the stock market in that process. Now, obviously we need to stay diligent to things like diversification, not getting overexposed, reexamining risk tolerance, perhaps, especially if you're retired or nearing retirement.
We're Optimistic on the Future
The fact of the matter is for all of these reasons, I'm actually pretty optimistic about where the US economy is going. I hope you found this helpful.
If you have any questions on this or any other issue, as always, please give us a call here at Vizionary Wealth Management. We are always here with perspective for the decisions ahead.
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