We have come a long way in the last twelve months. In response to the coronavirus pandemic, concerned governments around the world closed large portions of their economies, restricting commerce and the socialization of their citizens. The commensurate economic recession was one of the shortest on record, as the monetary authorities (Central Banks), stepped aggressively into the financial markets, suppressing interest rates and providing extraordinary liquidity into shaky bond and stock markets. Markets stabilized, with interest rates hovering very close to zero percent in most developed countries for much of last year.
By the end of summer, investors began to focus on the potential for economic recovery. The substantial fiscal stimulus programs seemed to be working, protecting the more vulnerable businesses and citizens. Interest rates began to slowly creep higher and stock markets bounced back to pre-pandemic levels. Prospects for successful vaccination programs boosted investor and consumer confidence.
We have been amazed at the statistical economic recovery in the U.S. ahead of a return to normalcy. Estimates for economic growth in 2021 are off the charts – we anticipate 6% to 10% GDP growth for the year – as the combination of aggressive fiscal stimulus and a return to regular economic activity spurs confidence. To put the scope of fiscal stimulus into perspective, 2020’s pandemic-response package amounted to $3.3 trillion (nearly 16% of GDP) and the American Rescue Plan that Congress passed in March is worth $1.9 trillion (almost 9% of GDP). Amazingly, more than $1 trillion will be spent in the next five months. Looking further ahead, the government has signaled infrastructure spending to further propel investment and growth. We will provide color on the economic impacts as plans become clearer.
With record economic growth expected this year and the massive increase in the global money supply, fears of higher levels of inflation are creeping into investor’s minds. Supply chains around the world are tight and consumers appear to be flush, even before a return to more typical economic conditions. Personal savings is approximately $1.3 trillion greater than it was one year ago, and consumer net worth increased 10% in 2020. Already, rising inflationary pressures are evident in housing prices, lumber, and energy prices as well as many consumer discretionary products and staples, not to mention stock prices.
For many, the rapidity of the recovery in the financial markets is difficult to reconcile with the slower process of opening economies. Most stock markets have moved to all-time highs and seem to be pricing in economic expansion, not just recovery. While expectations for corporate earnings growth in 2021 are exceptionally strong, valuations for stocks have become stretched. Retail investors are back and very actively trading, with popular IPOs and many technology companies sporting speculative valuations and spectacular price volatility. In such an environment, we believe thoroughly understanding a company’s fundamentals and being sensitive to price is particularly critical.
Longer term interest rates here in the U.S. bottomed last year and have moved up notably this year. Higher interest rates have resulted in losses for most bond market sectors thus far in 2021. In the first quarter, the domestic bond market as represented by the Bloomberg Barclays US Aggregate Bond Index was down 3.3%. For most of the last 40 years, declining interest rates provided positive returns to bond investors and a source of stability for investment professionals managing diversified portfolios. Given the volatile interest rate landscape, we are focusing on investing in shorter-term bonds.
2021 looks to be a year full of the potential for change. Patience, effective asset allocation decisions, and careful attention to preserving capital will pay off in the long run. We look forward to talking with our clients about making thoughtful decisions and effecting successful strategies for this year and the coming years.
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.