By: Wayne Duggan
The S&P 500 has taken a breather from making new highs in recent weeks after a strong start to 2021. The additional upside or potential downside in stock prices from this point forward will be determined by how well the U.S. economy can continue to recover from the pandemic.
Here are three critical economic metrics every investor needs to monitor in the coming months.
1. Gross Domestic Product Growth
In March, the Federal Reserve raised its 2021 U.S. gross domestic product (GDP) growth projection to 6.5%, up from just 4.2% in December 2020. In April, the Commerce Department reported U.S. GDP growth in Q1 was slightly below that figure, at 6.4%.
It’s important for investors to remember that the next several quarters of GDP growth will be extremely high relative to historical norms. The economy was literally shut down during the worst of the pandemic last year. Headline growth numbers above 6% may seem impressive at first glance, but investors should focus on how GDP growth stacks up against the Federal Reserve forecast and whether that forecast changes in the coming months.
Investors should also pay close attention to monthly and weekly employment updates. Weekly U.S. jobs reports come out on Thursday mornings, and monthly reports come out on the first Friday of each month.
In April, the U.S. economy added 266,000 jobs. That number may seem like a step in the right direction, but it was a sharp drop from the 770,000 jobs the economy added in March.
The extremely low April jobs number will make the May jobs report even more critical. Another low number could be a sign that the labor market recovery is stalling out or that the Pandemic Emergency Unemployment Compensation is incentivizing workers to stay home. At the same time, a better-than-expected May number (and an upward revision of April’s number) could suggest that April was simply an outlier and can be mostly ignored.
One of the most important numbers that have been weighing on the stock market in recent weeks is the consumer price index (CPI), a popular measure of inflation. The U.S. government has spent more than $6 trillion on economic stimulus since the beginning of 2020, and investors are rightfully concerned that all that money printing could trigger a major spike in goods prices.
In March, the Fed raised its 2021 personal consumption expenditure price index (PCE) inflation target from 1.8% to 2.4%. However, the Labor Department recently reported a 4.2% rise in CPI in April.
Out-of-control inflation could force interest rates sharply higher, which would typically be considered bad news for growth stocks and good news for banks.
The Fed has said it is content to let inflation rise above the 2% figure it has historically targeted, and that any inflation above that rate is likely temporary. The rub now becomes whether the market believes that this inflation really is a short-term trend, and if investors start to predict the Fed will soon raise rates.
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