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Ready to Party in Vegas? (Newsletter Preview)

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Tech companies have been smashing earnings expectations this week. Tesla, Google, Visa, Microsoft, AMD and several others beat expectations in the first two days of the busiest earnings week. 

What does this mean going forward?

The big question coming into 2021 was how the economy and stock market would hold up after Covid subsided. In other words, when the tide of the 2020 crisis receded, would we see a damaged economic infrastructure? Or were we able to escape without creating a systematic collapse?

So far, Q2 earnings are pointing towards the second scenario: Most companies are doing well, consumers are spending money, and pent-up demand is being released into the economy. 

Is the economy healthy?

The one major point that bears point out is the large unemployment numbers. Of course, large unemployment usually means a struggling economy where businesses aren’t hiring. However, the opposite is actually true here: Many service industry companies are having trouble finding people interested in work.

This trend is partially due to the large unemployment benefits being offered by the government. Some people are incentivized to stay unemployed to collect larger benefits, while they last. There’s nothing wrong with that. People respond to incentives and the government has created a good incentive for people to stay unemployed.

So it’s a fallacy to say that high unemployment automatically means the economy is in bad shape. High unemployment due to people’s election to not work doesn’t send the dire economic message that high unemployment in 2009 sent. 

Because of this, I am bullish on the health of the economy and the mid-term outlook for the markets. In almost all ways, companies are doing well. Every time I’ve been to a restaurant on a weekend night over the past couple months, the place is packed with a 45 minute wait.

Remember 2009? Restaurants were closing up because many couldn’t afford the luxury of going out to eat. Do you see that now?

Thankfully, many of the speculative bubbles have been corrected. SPACs with zero revenue have fallen more than 50% over the last couple of months, which tells me the market is behaving relatively rationally. Valuations for tech companies may be high, but I think many of the stronger tech companies justify high valuations.

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