Nicolet Wealth Management Market Update.
Thank you for your continued confidence and trust in Nicolet. The S&P 500 Index has now gained over 75% since the current equity market cycle started 11 months ago. We are now experiencing the strongest bull equity market since 1932, when the market rallied off the Great Depression lows. Perhaps, even more remarkable, is that the market is now 15% higher than the February 2020 pre-pandemic peak.
The most recent gains can be attributed to strong fourth quarter 2020 corporate earnings. Market expectations were that earnings would contract by -11% compared to the previous year. However, actual results showed a positive surprise +2% growth. Results were driven by both higher sales and better than expected profit margins. Additionally, the strength was broad based, with around 80% of companies exceeding expectations. Expectations for earnings growth in 2021 were also raised. The market now anticipates that 2021 earnings will be over 20% higher than 2020 results, and 5% higher than 2019 pre-pandemic earnings.
Economic activity continues to exceed expectations as well. Industrial production increased for a fourth straight month in January, with most sub-manufacturing industries posting gains. The unemployment rate continues to fall, now at 6.3%, as we are about 8.5 million workers below peak February 2020 employment. Real GDP grew by an annualized 4% in the fourth quarter. Growth was driven by strong results from housing, corporate spending, and inventory restocking. Growth was not nearly as strong as the 33% rate seen in the third quarter. However, it does suggest that the U.S. economy has now recovered nearly 90% of the economic damage done by COVID. Full year Real GDP contracted by 3.5% in 2020 after growing 2% in 2019. Several bullish economists now forecast that Real GDP could grow by over 5% in both 2021 and 2022. This high level of growth has not been seen in decades, and is based on the assumption that COVID cases continue to decline, a successful vaccine distribution effort, and accommodative fiscal policy from enacted and anticipated legislation.
Another important assumption is that the U.S. consumer returns, as 70% of domestic economic activity can be attributed to consumer spending. In 2020, many consumers had the means but not the opportunity to spend, resulting in a very high savings rate, nearly double the long-term average. As a result, households have built up excess savings estimated to be as high as $1.5 trillion. Additionally, U.S. consumers are in a strong position compared to prior recoveries, with healthy balance sheets and improving incomes. This pent-up demand should be released into the economy as vaccines are distributed.
Improving growth trends, however, will likely continue to put upward pressure on longer-term interest rates. So far this year, the yield on the benchmark U.S. 10-year Treasury note has increased from 0.93% to 1.37%, approaching pre-pandemic levels. Inflation will also likely continue to trend modestly higher as economic growth improves, and the budget deficit grows. However, inflation should remain contained and below disruptive levels at least until employment returns to normal levels.
Volatility and uncertainty has continued into 2021. Nicolet Wealth Management continues to maintain a disciplined long-term approach and is prepared for a range of potential outcomes. If you would like to discuss your account in more detail, please contact us at your convenience.
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Nicolet Wealth Management is a brand name that refers to Nicolet National Bank and certain of its departments and affiliates that provide investment advisory, trust, retirement planning and insurance services.
Nicolet Advisory Services, LLC, is an investment adviser, registered with the U.S. Securities and Exchange Commission, and an affiliate of Nicolet National Bank. Nicolet Advisory Services, LLC recommends the brokerage and custodial services of TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is not affiliated in any way with Nicolet National Bank or its affiliated companies.