Three Economic Reasons to Give Thanks

With the year winding down, LPL Financial’s chief market strategist reflects on what investors have been grateful for over the past 11 months, from the strong U.S. consumer to the soaring stock market.

By DJ Shaw

There are less than six weeks left in 2021, and it has been a strong year for stock market bulls. In fact, in many ways it could go down as one of the best years ever for the markets. This week, in honor of Thanksgiving, Ryan Detrick, LPL Financial chief market strategist, offers three reasons for investors to be thankful, from the stock market to the future of the economy.

Stock Market Returns

The S&P 500 Index is up approximately 25% for the year, which currently ranks it as one of the best years ever. Although this year hasn’t been perfect, Detrick points out that earnings have come in substantially better than expected, with 2021 S&P 500 earnings expectations up nearly 25% from where they were at the start of the year, helping to justify stocks’ current levels.

If the S&P 500 were to end at its current level, it would rank as the index’s 15th best year since 1950. In fact, the S&P 500 is on pace to be up at least 15% for three consecutive years for only the second time in history, exceeded only by a streak of five in a row in the late 1990s.

This year has also seen the second most all-time highs ever for the S&P 500. 2021’s 66 all-time highs put it above the 65 new highs in 1964 and are second only to the record 77 new highs in 1995. Although Detrick says he believes it is unlikely the index will set a new record for all-time highs in 2021, there is a potential for further gains ahead through year-end.

The U.S. Consumer

The country has not been able to put COVID-19 fully in the rearview mirror in 2021 as many had hoped. However, the most powerful engine in the US economy—the consumer—has remained remarkably strong, Detrick says. Despite the lingering effects of the coronavirus, inflation fears and the absence of stimulus checks, the U.S. consumer continues to spend. Last week was a stark reminder of that, as October retail sales showed the strongest month-over-month growth since March, besting economists’ expectations across the board. Retail sales have now climbed in six of the past eight months, according to the Commerce Department, so far avoiding worries that consumer demand would drop off without additional fiscal stimulus.

Results from corporate America paint a similar picture. Retailers, including Home Depot, Lowe’s and Target, all reported earnings last week that came in above analysts’ expectations. Detrick notes that the consumer discretionary sector is tracking to a 58% year-over-year increase in earnings for 2021, and that strength could continue into next year and fuel an increase in 2022, greatly exceeding the expected earnings growth rate for the broader market.

It is important to note, however, that consumer confidence has fallen since the summer and has yet to recover to pre-pandemic levels. Detrick says it would be more ideal to see those measures turn higher in the near term, but, overall, it is more important to watch what consumers are doing with their money, rather than how they feel. Excess savings, rising wages, a strong wealth effect from stock market gains and high housing values should help to fuel strong spending this holiday season and into next year.

Looking to 2022

Thanks to a combination of continued healthy earnings, adaptable U.S. corporations and workforces, a solid U.S. consumer, and the tailwinds of both monetary and fiscal policy, many experts agree that stocks are expected to continue doing well in 2022, outperforming bonds once again.

The third reason to be thankful, Detrick says, is a big year for stocks historically means the following year could be strong as well. In fact, the past nine times the S&P 500 was up at least 20%, the following year saw positive returns. He says his calculations show that the year after a 20% gain has averaged a solid 11.5% return and been higher 16 out of 19 times. After the returns of the past few years, most investors would probably welcome an 11.5% return in 2022.

Detrick acknowledges that things haven’t been easy over the past 20 months but adds that investors should be grateful for how strong 2021 has been. The U.S. consumer is the biggest key to how the economy will do going forward, and he predicts consumers will surprise to the upside and help drive solid growth next year.