It’s hard to believe that the economy was essentially put on hold just a year ago. There were quarantines. Shut down. Closing down businesses, schools, supply chains and our daily lifestyles. This resulted in the worst quarterly economic slowdown in history in the second quarter of 2020, which amounted to -34% on an annual basis.
But somehow we are now on the way to an economic upswing.
Goldman Sachs Analysts said in a recent outlook that they now expect economic growth of 8% in 2021 and an unemployment rate of 4% by the end of the year. They believe the unemployment rate could only reach 3.2% by 2023. Treasury Secretary Janet Yellen thinks we could have full employment again next year.
Of course there is a reason for this lightning-fast processing. The government has helped keep things alive by spending money and sending money. Trillion dollars were sent to businesses, communities, and individuals, including the latest $ 1.9 trillion business cycle.
This huge contraction was also likely the fastest recession in US history. And the sheer amount of government spending means we’ve seen one of the biggest economic booms ever to emerge from a downturn.
Investors moved from concerns about the potential of another global economic crisis to their greatest risk last March Inflation spike a combination of government spending, supply restrictions, and pent-up demand when people are vaccinated.
Inflation can be detrimental to the stock market, but it’s hard to imagine investors selling their stocks in the middle of an economic boom.
Did the stock market ever collapse when the economy soared?
It’s rare, but it has happened before.
In the 1930s, when GDP was invented as a metric, real economic growth in the United States averaged about 3% per year. The stock market is not the economy, but there is a relationship between GDP growth and the market over time, especially when growth is high.
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This is not a perfect relationship, but you can see that the higher the real GDP growth, the higher the average annual stock market returns.
Averages can often hide outliers, and the only outlier here was in 1937. Real GDP growth was over 5%, but the S&P 500 ended the year down 35%. One of the reasons stocks fell so much this year is because the economy began to slow down towards the end of the year, resulting in a recession that lasted until 1938.
The highest growth with a stock market decline was in 1941, when GDP rose double-digit year-over-year while the S&P 500 ended the year down nearly 11%. This was one case where World War II investors got scared.
Otherwise, with economic growth this high, stocks have generally made strong returns. In seven of the eleven years that real GDP growth was 8% or more, the stock market was in double digits.
As a result, the stock market rarely falls at the same time as a booming economy.
However, there is one limitation that may apply in today’s environment. While it is rare for the stock market to fall in a booming economy, it is also rare for the stock market to boom amid a nasty recession like it did in 2020.
There is a possibility of investor reaction to the sale of the news as the market was already up around 80% from the bottom by the end of March 2020. This is a risk worth considering.
However, betting against the stock market in what may be the strongest economic environment since the 1990s seems an even riskier endeavor.
Ben Carlson is Director of Institutional Asset Management at Ritholtz Wealth Management. He may own the securities or assets discussed in this piece.
This story was originally featured on Fortune.com