Investor Essentials Daily

Rising productivity fuels overconfidence in the market

March 18, 2024

The pandemic’s onset in early 2020 led to significant economic instability, with sharp increases in unemployment and economic downturns following lockdowns.

Despite initial disruptions, corporate America and the economy quickly rebounded, aided by a surge in labor productivity, notably a 20% year-over-year increase, reaching an all-time high.

This productivity boost, partly due to the shift to remote work, contributed to significant economic growth of 5.9% in 2021 and a strong stock market performance.

However, 2022 saw a decline in productivity as people returned to offices and faced rising interest rates. In 2023, early adoption of artificial intelligence (“AI”) began to positively impact labor productivity again, with AI companies significantly driving market gains.

Despite these advancements, underlying economic challenges, such as high-interest rates and potential debt struggles for companies, persist, indicating that while AI may support economic efficiency and future market growth, it is unlikely to prevent a recession or alleviate imminent financial pressures on companies.

Investor Essentials Daily:
The Monday Macro Report
Powered by Valens Research

The beginning of the pandemic in early 2020 was accompanied by a period of unprecedented economic turbulence…

While lockdowns officially started in March 2020, the worst economic effects started showing up in the following few months.

For instance, as service businesses like restaurants and movie theaters completely shut down, a lot of that didn’t show up in unemployment data until April.

The U.S. unemployment rate was 4.4% in March 2020, and 14.7% the following month.

And after the first full quarter, companies started publishing their first pandemic-era results. Shockingly, corporate America looked fine. If anything, it looked like folks working from home helped make the economy look stronger

Economists looked to data like labor productivity, which measures the country’s total economic output divided by the number of hours worked. Productivity surged about 20% year-over-year to an all-time high.

That’s a huge reason why both the economy and the stock market rallied so fast after the initial panic. Over the long-term, the stock market tends to follow labor productivity closely.

Through 2021, labor productivity stayed strong. Folks were still working well from home, and pretty much the rest of the economy opened back up.

That drove the U.S. economy to grow by 5.9%, its best year since the 1980s, and it drove the S&P 500 to rally by 29%.

2022 was a different story… a mix of folks heading back to the office and rising interest rates forced productivity back down.

While 2023 was only the early innings for artificial intelligence (“AI”) adoption, it seems to already be making a difference.

Despite all our warnings that a wave of defaults is on the horizon, early investments in AI seem to be helping labor productivity.

Productivity increased in each quarter in 2023, and it reached an all-time high in the fourth quarter.

Take a look…

AI is doing what it promised to do. It’s helping make workers more efficient.

And over the last year, that’s what investors paid attention to. AI companies like the “Magnificent Seven” have driven most of the market’s gains since 2023 began.

AI is still in its early innings, which means we haven’t even begun to understand all the ways it’ll make our economy more efficient.

However, AI cannot save us from what’s right ahead of us. Beneath the surface, companies are still struggling to deal with their debts as interest rates remain high.

We haven’t seen a wave of defaults… yet. It’s unlikely that AI is going to save companies that are near distress.

AI will help drive the next bull market… it won’t prevent a recession. This is yet another reason we’re bullish for the U.S. stock market over the next decade-plus. However, don’t let that distract you from the risk that’s right in front of us.

Companies are going to struggle with defaults, and a wave of bankruptcies is bound to slow down recent labor productivity gains.

Keep focused, because investor sentiment can switch quickly.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

View All

You don’t have access to the Valens Research Premium Application.

To get access to our best content including the highly regarded Conviction Long List and Market Phase Cycle macro newsletter, please contact our Client Relations Team at 630-841-0683 or email

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at 630-841-0683