US Business Cycles Stock Market and Earnings Consumer Price Index Federal Budget Deficit to GDP Federal Funds Rate

1. Client Update - Second Half of 2021
Paul Caylor, CDFA, CFP, CKA, RICP | President & Wealth Advisor | August 2, 2021

2. • The economy officially fell into recession in early 2020 for two months due to the economic shutdown
from COVID-19.
• Prior to this, the economy had been experiencing the longest cycle in history, surpassing the decade-long
cycle of the 1990s
• The economy is now at record levels and growing at a rapid pace.

3. • This chart shows the S&P 500 index alongside its trailing 12 months earnings-per-share.
• Over the long run, the stock market tends to follow earnings. If earnings are rising, investors are willing to
pay more per share.
• Earnings, in turn, tend to track economic growth. Thus, a healthy economy tends to result in a rising stock
market.

4. • CPI is a commonly cited measure of inflation. It uses a basket of goods and services to track price changes
for consumers.
• In order to measure the underlying trend in inflation, rather than temporary shocks to food and energy,
economists often focus on Core CPI.
• Inflation has begun to heat up as the economy reaches new historic peaks.

5. • The U.S. has historically run a budget deficit each year.
• The deficit is simply the difference between federal government revenues and expenses.
• Deficits tend to spike during recessions and wars.

6. • The Fed has kept interest rates at the zero lower bound since the pandemic began.
• Most importantly, the Fed also announced that it will allow inflation to run hotter before adjusting policy.
• This has spurred fears of rising inflation which has pushed many interest rates higher this year.

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