First Quarter 2021 Update
April 21, 2021
While the economy is not totally out of the woods yet, the consensus expectation among economists is that 2021 should show a marked improvement.
- The US economy marched higher in the quarter as it continues to rebound from the severe recession brought on by pandemic-related lockdowns. With the economy beginning to increasingly open up, prospects for 2021 look more promising.
- The central bank adopted a flexible average inflation target framework, which will allow the committee to keep interest rates near zero even while inflation exceeds its target. The FOMC expects interest rates to remain near zero until sometime in 2023.
- Stocks posted a fourth consecutive quarter of strong gains following the sell-off in 2020’s first quarter. Many broad indexes have now rallied by 50%-90% since bottoming in March 2020.
4th QUARTER 2020 MARKET COMMENTARY
Below, we’ve highlighted 2020 broad market returns for the fourth quarter and year-to-date time periods:
|MSCI Emerging Markets||2.2%||2.2%|
|S&P Real Assets Equity||7.4%||7.4%|
|Barclays Muni 5 Year||-0.5%||-0.5%|
THE GLOBAL ECONOMY
The US economy marched higher in the quarter as it continues to rebound from the severe recession brought on by pandemic-related lockdowns. In addition, Congress recently enacted the American Rescue Plan Act, a $1.9 trillion fiscal stimulus package that is expected to keep the recovery’s momentum going. Improvements in vaccine rollouts are also anticipated to have a positive effect on global growth in 2021.
Within this context, the Bureau of Economic Analysis released the third estimate of the fourth quarter 2020 real GDP, a seasonally adjusted annualized increase of 4.3%, slightly better than the prior estimate of an increase of 4.1%, but significantly lower than the record-setting 33.4% increase in the prior quarter. From an economic perspective, 2020 was one of the most difficult years in US history, with the economy contracting by -2.4%. With the economy beginning to increasingly open up, prospects for 2021 look more promising.
The employment situation continues to recover, albeit in inconsistent fashion. The March report showed that employers added 916,000 jobs in the month and that the unemployment rate fell to 6.0%. The Federal Open Market Committee (FOMC) maintained its supportive monetary policy response to the pandemic, leaving the funds rate target range of 0% to 0.25% unchanged. The central bank also adopted a flexible average inflation target framework, which will allow the committee to keep interest rates near zero even while inflation exceeds its target. The FOMC expects interest rates to remain near zero until sometime in 2023.
Stocks posted a fourth consecutive quarter of strong gains following the sell-off in 2020’s first quarter. Many broad indexes have now rallied by 50%-90% since bottoming in March 2020. Analysts have pointed to continued economic improvement resulting from diminishing adverse consequences of the pandemic, as well as the potential effects of the $1.9 trillion in fiscal stimulus recently passed by Congress. More widespread distribution of vaccines is also a contributor to heightened optimism, as lockdowns can be removed and more segments of the economy can begin to safely come back online. Returns on broad equity market indices were choppy throughout the quarter, but the trend was higher. When the quarter ended, the S&P 500 Index had advanced +6.2%, and has gained +56.4% over the past 12 months. The MSCI EAFE Index of developed markets stocks advanced by 3.5%, Emerging Markets performance was modestly positive, as the MSCI Emerging Markets Index was higher by 2.3%.
The FOMC made no change to the federal funds rate target range of 0% to 0.25%, but it is now implementing a new flexible average inflation targeting framework. With this new approach the committee will allow inflation to run higher than its equilibrium target of 2% before implementing rate increases. Indeed, the Summary of Economic Projections indicated that inflation is likely to be higher than the target over the next few years, but the expected path of the fed funds rate remains little changed. The FOMC believes the economy remains quite far from its objectives and, despite stronger economic growth this year, the fed funds rate is likely to remain at current levels for the foreseeable future.
Fixed income securities’ prices on balance were lower (and yields higher) in the quarter as the global economy continued to heat up and inflation expectations rose. Even though the FOMC and other central banks throughout the world maintained an aggressive monetary policy stance, trillions of dollars of fiscal stimulus passed by Congress have heightened the specter of inflation.
Many economists and analysts had expected the US economy to have a difficult year in 2020; but it turned out much worse than anyone could have anticipated and, in hindsight, was one of the most challenging in the nation’s economic history. Among the contributors to the difficult environment were, of course, the onset of COVID-19 and the subsequent lockdowns that resulted from trying to contain it; the rancorous presidential election cycle; and, a slew of geopolitical issues such as the long-running Brexit negotiations and a trade war with China. While the economy is not totally out of the woods yet, the consensus expectation among economists is that 2021 should show a marked improvement.
In addition to the pandemic being likely to wind down, the approved vaccines should enable states to more aggressively open. There is a significant amount of pent-up demand for the products and services that have been avoided over the past nine months, and economists believe that higher-income households will be able to increase spending. While the recovery has been V-shaped, the economy has a way to go to fully return to pre-pandemic levels, and it is anticipated that it could take multiple years to completely recover. But the US economy is extremely resilient, and absent policy-making missteps, should continue to make positive strides.
The recently passed stimulus package is expected to provide additional fiscal support to the recovery. Economists are optimistic that the recovery from the pandemic will be much shorter than the time it took the economy to recover from the financial crisis.
Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.
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