By Michael Brush
When the stock market sells off, as it did Thursday, the right move was to buy your favorite stocks. Friday’s market action proved that.
It’s true that there could be a correction, given the already sizable 17% gain in the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.52% this year. But you should buy then, too.
We are still only in the early stages of what is going to be a three- to five-year bull market in stocks, for these six reasons.
1. There’s tremendous pent-up demand
Everyone is looking to the Federal Reserve for cues about stimulus. They are overlooking private-sector forces that will push stocks higher. To sum up, there’s huge pent-up private-sector demand that will help propel U.S. GDP growth to 8% this year and 3.5%-4.5% for years after that. The pent-up demand comes from the following sources, points out Jim Paulsen, chief strategist and economist at the Leuthold Group.
First, there’s been a surge in household formation, as millennials hit the family years. This helps explain the big uptick in home demand. Once you buy a house, you have to fill it up with stuff. More consumer demand on the way.
Behind the scenes, consumers have massive unspent savings because they hunkered down for the pandemic. The personal savings rate hit nearly 16% of GDP, compared to a post war average of 6.5%. The prior high was 10% in 1970s.
Relatedly, household balance sheets improved remarkably. Debt-to-income ratios are the lowest since the 1990s. Consumers will continue to tap more bank loans and credit card capacity, as their confidence increases because employment and the economy remain strong.
Next, there will be plenty more newly employed people once the extra unemployment benefits expire in September. This means consumer confidence will improve, which invariably boosts economic growth. The labor participation rate has room to improve, leaving spare employment capacity before we hit the full employment that can cap economic growth.
Now let’s look at the pent-up demand in businesses.
You know all the shortages of stuff you keep running into or hearing about? Here’s why this is happening. To prepare for a prolonged epidemic, businesses cut inventories to the bone. It was the biggest inventory liquidation ever. But now, companies have to build back inventories. The ongoing inventory rebuild will be huge.
Companies also cut capacity, which they are building out again. Capital goods spending surged to record highs in the past year, advancing almost 23%, after being essentially flat for most of the prior two decades. This creates sustained growth, and it tells us a lot about business confidence.
The bottom line : We will see 7%-8% GDP growth this year, followed by 4%-4.5% next year and above average growth after that, supporting a sustained bull market in stocks. Expect the normal corrections along the way.
2. An under-appreciated earnings boom lies ahead
The economic rebound has happened so quickly, analysts can’t keep up. Wall Street analysts project $190 a share in S&P 500 earnings this year. But that is woefully low given the expected 7%-8% GDP growth and massive stimulus that has yet to kick in. Stimulus normally takes six to eight months to take effect, and a lot of the recent dollops happened inside that window.
Paulsen expects 2021 S&P 500 earnings will be more like $220 instead of the consensus estimate of $190.