Economic Cycles Running Hotter, Shorter, Faster

#speed #economy #GDP #business #financial #markets

$SPY $SPX

“Everything is happening faster, the markets, the economy, and the business cycle too!”— Paul Ebeling

Just In: S&P 500 has set another all-time high at 4,392.39 and closed at 4,369.21 on the day.

In mid-June, Chetan Ahya at Morgan Stanley published a note to clients that argued that the VirusCasedemic instant recession and instant response has ushered in a new economic era in which “economic cycles run hotter, shorter.” 

 The Key feature of the virus chaos economy has been speed. 

The speed with which the economy shut down last year rocked markets and the general public. The speed with which the economy re-opened was very surprising indeed. 

The speed with which a COVID-19 vaccine was developed, although I have seen data that says the vaccine was developed in mid-2016 by Big Pharma before the attack, and subsequently rolled out in the US, is the scientific achievement of a generation. 

The pace has not ebbed.

Last wk investors almost all at once noticed the benchmark 10-yr T-Note yield had fallen to multi-month lows. That move in part reflects a view that 2021’s roaring economic growth will not be sustained. Almost as fast as the economy shut down and re-opened, we now see investors expecting the economy to return to its pre-virus trend: Due North! 

Companies representing more than 67% of the S&P 500’s market capitalization are currently growing faster than they did pre-virus, according to a note published last week by Deutsche Bank. These businesses also last accounted for 60% of the index’s sales and profits.

This performance within the market is also reflected in industry-level activity which feeds into GDP growth. For example: consumer spending on durable goods, furnishings, and cars all come in way above pre-virus marks.  

“It is very unusual for any [GDP component] to be above trend levels 1 year into a recovery, or for that matter even 2 or 3 years into it,” Deutsche Bank wrote. “Beyond the disparity across categories of spending, the fact that several of them are already well above trend this time by itself renders this recession and recovery unique compared to historical cycles.”

This notion of cycles happening more quickly, and with more force, is something we have seen come up in more and more Wall Street research over the last several wks.

A fast running economy means a faster return to full employment. But tightening policies later in the recovery may run the risk that shifts in policy stances could become more disruptive, truncating economic cycles. If so the newly efficient market will deal with it.

Investors can be sure the policy and lawmakers will let the economy collapse in on itself.

Have a prosperous day, Keep the Faith!