The spring is typically one of the stronger seasons for the stock market.
With that in mind, today we will take a look at the markets and economy from the last month – March – and forecast what we could expect moving forward this spring.
Today we will cover:
- COVID vaccine recovery to boost economy?
- Stimulus checks working?
- Inflation on the rise?
- Interest rates to go up?
- AND – Market and economy factors to watch for this Spring
COVID-19 vaccine recovery to boost economy
The accelerated rollout of vaccines, combined with drops in deaths and case loads reported across the USA is leading to an increase in optimism for many analysts and investors.
For the first time in over a year, there has been less than 700,000 filing first time claims for jobless benefits.
Morgan Stanley expects the US unemployment rate will drop below 5% by the end of this year and below 4% by the end of 2022.
Goldman Sachs is calling for 2021 US GDP growth of 6.9%, the fastest since 1984. Morgan Stanley is even more bullish, predicting 7.3% growth. That would surpass the Chinese government’s humble target of 6%. More importantly, these Wall Street estimates for the US’ pace are not far from the 8.4% consensus forecast for China among economists polled by Refinitiv.
This would mark a dramatic upward swing following the 3.5% contraction suffered in 2020, the steepest annual downturn in more than seven decades.
Stimulus checks and Rescue Plan working?
The recently signed $1.9 trillion American Rescue Plan and the continued vaccine rollout are 2 major factors behind the optimism we have seen this spring.
As life begins to regain normalcy, regular spending habits should resume. Sectors of the economy that has felt the brunt of the coronavirus impact this last year, such as tourism, hospitality and retail, should be the main benefactors of an invigorated economy.
But, in the short term, the stimulus package/ rescue plan will push and stimulate personal consumption. And, savings reserves from the middle and upper class, once unleashed into circulation, will only add to the economic recovery.
GDP growth forecast to 7.2% for 2021 because of the size of the American Rescue Plan and progress in defeating the pandemic.
We could all be underestimating the coming expansion,” Brusuelas said. “This could literally be the single largest expansion since the middle of the 20th century.”
Inflation on the rise?
The role inflation has to play in all of these forecasts can’t be discounted.
February 2021 saw a 1.7% inflation increase year over year. The rate for 2020 as a whole was 1.36%, dropping from 2.29% in 2019. Last March and in particular April, and November lesser so, were the 3 months with negative month over month inflation from the previous year (2019). This can be correlated to the onset and second wave of COVID cases and the respective shutdown.
Some experts warn that the anticipated surge in consumer spending could push the inflation rate up above 2.5% later in 2021.
So why is this number a cause for concern?
With the economic outlook brightening, Covid-19 cases falling and more fiscal stimulus on the horizon, nervousness about inflation is percolating. That means pricing power is set to become an intriguing alpha generator due to the wide variance in how companies cope with it” according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.
Interest rates to go up?
Fed says they’re not going to raise rates, and may not for years. But let’s take a quick look at the data.
With inter-bank lending rates continuing at 0.00-0.25%, the fed rate continues to be at the lowest rate possible, in an effort to keep money circulating through all sectors of the economy during the pandemic shutdown. The rates dropped just over a year ago to levels unseen since the onset of the financial crisis of 2008-2009.
The only realistic circumstances that could see a rise in the fed rate, at least later in 2021 or in 2022, are:
• If the GPD increases in 2021 markedly over the 6.5%-8% projections currently circulating
• If the inflation rate pops above 2.5%.
However, the fed rate is independent of mortgage and auto loan rates. Consumer rates could well see an increase from decades-long lows as the economy gets revitalized and consumers resume their traditional spending habits.
The Fed has pretty much said that they’re going to keep interest rates low for a while. They want to see a lot of inflation before they even think about raising rates, but it’s important for investors to remember that things like mortgage rates and auto loan interest rates, they’re not dependent on the federal funds rate. You can have mortgage rates rise without the federal funds rate rising. They tend to move in the same direction over time, but one is not tied to the other.
Market and economy factors to watch for in Spring 2021
According to analyst Gord Collins, here are the 2021 market factors to watch:
• Economy had a solid 4% growth in the 4th quarter 2020
• Markets climbed as investors seem optimistic
• Corporate earnings will sour in the 4th quarter
• Fed says they’re not going to raise rates, and may not for years
• $5 trillion is sitting in money markets
• Oil price is rising toward $60 a barrel
• NASDAQ, S&P, and Dow keep reaching new records
• US dollar is falling
• New government just injected $1.9 trillion in stimulus
• COVID pandemic is moving past its worst months
• Trade war with China continues to heat up emotionally
• Facebook, Google and Amazon stocks under pressure of DOJ anti-trust investigations
• Renter evictions, and landlord bankruptcies looming
• Unemployment claims rise after COVID resurgence maintains shutdowns
Late last Friday, the S&P reached its highest of the week, the DOW jumped 450 points, NASDAQ rose 1.2%, while the other indexes rose strongly after news of low inflation ahead. Real estate, energy, technology and materials had the strongest gains at close of markets last week.
Let’s keep in mind:
“Many of the strongest stock market forecast factors are volatile and uncertain such as: trade relations, Covid 19 infections, new Covid 19 variant breakouts, government standoffs and responses, economic shutdowns, pessimism, election outcomes, inflation, job reports, citizen fatigue, and tax issues. The concern is more for beyond 2022”.
Both the market, AND the economy look to both move in an upward direction in 2021. We see indications of economic recovery across the board, and robustly growing GDP for 2021. Investors and consumers will do well to stay strong in the next few months to year through continued turbulence, until COVID containment and economic recovery stabilizes.
With optimism on the horizon, it is a time to reflect on next moves for the capital that may have been sitting still over the last year.
We are just a call or email away to answer any of your questions regarding investments in the US and Florida.