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June 16, 2021, 6:00 a.m. EDT

Saddle up for a summer rally in the stock market

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Peter Morici

Brace for a summer rally.

Even with stocks pushing new records and the  Federal Reserve under pressure from inflation to push up interest rates , the outlook for corporate profits is strong and that  will overwhelm the pessimism among a chorus of experts .

COVID shutdowns caused the most dramatic economic contraction since the Great Depression but in 2020, the  Federal Reserve printed $3.1 trillion  to effectively finance stimulus payments and aid to small businesses and the unemployed, and to shore up state and corporate finances.

Ordinary investors piled in

Ordinary investors remained sanguine . After the market tumbled 34% with the onset of COVID,  many ordinary folks —enabled by  commission-free trading  pioneered by Robinhood—became investors and others  piled up record sums  in tax-sheltered retirement vehicles.

Since March of last year, the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.08% has rebounded about 90% but how that happened in an economy that lost 22 million jobs and is still  10 million below pre-COVID trend  owes a lot to the peculiar nature of the COVID recession.

In large measure, permanent business closures were  concentrated among small enterprises . Healthy corporations were able to curtail investments to  build   cash buffers . Rock-bottom interest rates permitted firms rendered to junk status, such as Ford /zigman2/quotes/208911460/composite F +0.98% , to  raise funds in bond markets .

The private economy proved surprisingly adaptable.

Zooming and other cloud software replaced business travel and daily commutes with the potential historic significance that the Gutenberg printing press displaced the monk’s quill.  Hybrid office-home work arrangements will become more the norm  after the pandemic is behind us.

As restaurants, stores and other businesses reopened, encouraging stories abounded about American companies pouring billions into the next generation’s technologies. Consider electric-vehicle startups such as Tesla /zigman2/quotes/203558040/composite TSLA +3.11% and  Rivian , Amazon’s /zigman2/quotes/210331248/composite AMZN +1.14% Cloud revolution , Apple’s /zigman2/quotes/202934861/composite AAPL +0.35% call for engineers to literally invent 6G internet technology , and  Alphabet’s /zigman2/quotes/205453964/composite GOOG +0.72% Apple’s  and  GM’s /zigman2/quotes/205226835/composite GM +1.17% investments in artificial intelligence for autonomous driving.

Profits surging

With the vaccines’ rollout a dramatic success,  economic growth  and corporate profits are now surging. The ordinary investor—the  same guy  who routed  professional short sellers  in the GameStop /zigman2/quotes/203755179/composite GME +0.16% saga—anticipated all this and poured money into stocks for big gains.

They had few other choices. Treasury securities, CDs and money-market funds sported negative real yields, and the important thing to remember is that calculus still applies.

Should the Fed curtail its $120 billion in monthly bond purchases or raise the federal funds rate, the 10-year Treasury rate /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.65% could rise to 2.5%. That’s still on the low-end of the historical range and only in line with  expected   inflation .

Government bonds, high-quality corporate debt and CDs will pay ordinary folks very little or nothing after adjusting for expected inflation—and negative rates after they pay income taxes. But equities still offer ordinary folks the opportunity for returns that outrun inflation.

/zigman2/quotes/210599714/realtime
US : S&P US
4,415.11
+3.32 +0.08%
Volume: 897.59M
July 26, 2021 1:00p
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/zigman2/quotes/208911460/composite
US : U.S.: NYSE
$ 13.96
+0.14 +0.98%
Volume: 26.07M
July 26, 2021 1:00p
P/E Ratio
13.87
Dividend Yield
0.00%
Market Cap
$55.16 billion
Rev. per Employee
$683,570
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/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 663.42
+20.04 +3.11%
Volume: 13.38M
July 26, 2021 1:00p
P/E Ratio
664.86
Dividend Yield
N/A
Market Cap
$619.79 billion
Rev. per Employee
$445,694
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,698.17
+41.53 +1.14%
Volume: 1.37M
July 26, 2021 1:00p
P/E Ratio
70.30
Dividend Yield
N/A
Market Cap
$1844.13 billion
Rev. per Employee
$297,430
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 149.08
+0.51 +0.35%
Volume: 42.84M
July 26, 2021 1:00p
P/E Ratio
33.48
Dividend Yield
0.59%
Market Cap
$2479.11 billion
Rev. per Employee
$1.86M
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/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 2,776.27
+19.95 +0.72%
Volume: 571,524
July 26, 2021 1:00p
P/E Ratio
36.90
Dividend Yield
N/A
Market Cap
$1813.90 billion
Rev. per Employee
$1.35M
loading...
/zigman2/quotes/205226835/composite
US : U.S.: NYSE
$ 55.58
+0.64 +1.17%
Volume: 5.05M
July 26, 2021 1:00p
P/E Ratio
9.00
Dividend Yield
0.00%
Market Cap
$79.70 billion
Rev. per Employee
$790,226
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/zigman2/quotes/203755179/composite
US : U.S.: NYSE
$ 180.65
+0.29 +0.16%
Volume: 846,277
July 26, 2021 1:00p
P/E Ratio
N/A
Dividend Yield
0.00%
Market Cap
$13.85 billion
Rev. per Employee
$424,150
loading...
/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
1.28
+0.0083 +0.65%
Volume: 0.00
July 26, 2021 1:00p
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