April 10, 2021
Whew! March 2020 seems like a lifetime ago! We had just started on this COVID induced adventure. It’s turned out to be a series of personal, political, economic, and medical twists and turns. Hopefully, we’re getting a handle on the pandemic and can look forward to a more stable (normal) time period.
We had the deepest and quickest economic contraction at least since World War II. Now it appears we may post the best economic growth spurt in my lifetime. Of course, this will not be a straight line, but the promise is certainly there to make such a prediction.
Here’s a T-Chart with some of the pluses and minuses:
|The current pace of COVID-19 vaccinations is providing significant support for the economy.
|Vaccine hesitancy and the COVID-19 variants risk stalling or at least slowing businesses reopening and leisure travel.
|The labor market has made some steps toward recovery with almost 1 million jobs added last month.
|However, there are still about 8.4 million less people employed than a year ago.
|The Federal Reserve Bank has effectively gone all in to keep the economy in recovery mode.
|Its balance sheet has increased substantially. How will that impact the economy longer term?
|Interest rates will remain at extremely low levels supporting economic activity and asset values of all kinds.
|Someday, interest rates and asset values will return to a more typical relationship. Will this be a smooth adjustment?
|In the short term, inflation is going to be higher than we’ve been used to. For now, this transient inflation is related to pandemic related supply disruptions.
|However, if it’s permanent due to monetary and fiscal policy actions, inflation will add another layer of complexity to the recovery.
|The various stimulus/economic support payments have had a very positive impact on the overall economy.
|What happens as these payments come to an end?
For equity investors, the past twelve months turned out to be a ‘rainbow’ year. I don’t think anyone would have predicted the kind of equity returns we’ve seen, at least so quickly. On the other hand, you do have to remember how bad March 2020 actually was!
I believe I said last year not to get overly concerned about one month’s investment returns. This year, I would make the same comment – do not expect the recent returns to be a “new” normal.
As a reminder, Vanguard’s most recent outlook suggests US Equity returns of 3% to 5% going forward and bond returns to be in the 0.8% to 1.8% range. They also suggest the median volatility for US Equities to be around 16.9%. In essence, that means the stock market return could range from +21.9% to -11.9%. This could be a pretty wild ride.
Last summer, the prognosticators were giving us an alphabet soup of options for an economic recovery. At this point, I’m sticking with the K-shaped version. The people who could work from home are most likely on the upper leg of the K. On the other hand, if you lost your job and/or had COVID related challenges, you are most likely on the lower leg of the K.
For the remainder of 2021, the big factor will be the evolution of the coronavirus. When will the vaccine and other measures get the pandemic behind us?
Of course, as we deal with the pandemic, we still have our ‘normal’ economic concerns to deal with. It appears we’re on the edge of a long-term transition regarding energy. It will also be interesting to see if this tentative move from Reaganomics, pushed by the pandemic, is a longer-term phenomenon or transitory.
I see some suggesting that we are entering a Goldilocks stage of economic growth. This seems to me to be what the market wants to expect – low interest rates, economic stimulus, etc. will lead to a very robust recovery without long term inflation.
In the end, je ne sais quoi. But, what will be will be!