Economic Growth

Market Commentary: Vaccine Distribution, Stimulus Package Driving Economic Growth Estimates

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

The impact of government stimulus checks continues to permeate economic data. Personal income rose 10% in January, and disposable income rose 11.4%. Where did the money go? It primarily bought goods or was saved. Goods spending rose 5.8% in January, and the personal savings rate jumped to 20.5% from 13.4% the previous month (Figure 1). Limits on activity continue to pressure services spending, which rose only 0.7%.

Key Points for the Week

  • Government stimulus payments drove personal income 10% higher in January.
  • Economic growth estimates are rising on expectations for vaccine distribution and an additional stimulus package.
  • Interest rates have increased based on expectations for faster economic growth.

Investors are raising their expectations for economic growth and inflation because of the additional stimulus. Several economists have pushed growth expectations to more than 6% this year, and inflation expectations have moved above 2%. Actual inflation data remains weak, and the PCE price index rose only 1.5% over the last year.

The increasing growth expectations have contributed to rising interest rates. When rates rise, it often pressures the returns of stocks as well as bonds. Last week, the S&P 500 dropped 2.4% in response to economic data. The MSCI ACWI index sagged 3.3%. The Bloomberg BarCap Aggregate Bond Index fell 1.5% last week.

The U.S. employment situation will top economic reports next week. The primary focus will be on whether the service economy shows signs of strength based on mid-February survey data.

Figure 1

Looking Forward to More Growth

After a difficult and trying 2020, in which the U.S. economy contracted 3.5%, investors are looking forward to the prospect of growth. An environment of rising yields, inflation concerns, stock market highs, COVID uncertainty, government stimulus packages, accommodative monetary policy, and massive vaccine rollouts makes it even more difficult to confidently predict the future.

Let’s start with the most recent data. Personal income was up 10% in January, but the increase was almost entirely attributable to the $600 government relief checks and unemployment insurance payments. Consumer spending was also up 2.4% last month, marking the biggest increase since last June. This gives credence to the jump in retail sales numbers released last week as consumers are evidently spending the money quickly. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy component, the Fed’s preferred inflation gauge, rose 0.3% after a similar gain in December. This shows even with the increased spending, inflation currently remains benign.

The next stimulus package is moving forward through Congress, and economists are increasing their U.S. GDP estimates for the year to 6-6.8% growth. To put the stimulus’s potential effect in perspective, the Federal Reserve previously forecasted real GDP growth of 4.2% in 2021.

It’s important to note that even with the potential increased spending from more stimulus and the release of pent-up demand as the country reopens in the second half of the year, the Fed is currently not worried about inflation. It views any inflation uptick as transitory and has stated it will remain accommodative until labor markets improve in terms of lower unemployment rates and increased labor participation.

Meanwhile, the optimism about economic growth contributed to further increases in interest rates. The closely watched 10-year Treasury temporarily reached 1.5%, which is near the dividend yield of the S&P 500. If stock values are created using projected future cash flows, the value of these future cash flows declines when rates are rising. Rising yields often hit stocks with higher dividends hardest as their yields need to compensate investors for the additional risk and tougher competition from bonds.

2021 is shaping up to be much better than 2020, but numerous unknowns remain. Virus infection rates have dropped and levelled off, but there are potential new variant threats. The vaccine rollout is increasing as more vaccines are manufactured and approved, but we have yet to see how many people will forego a shot when it’s readily available. Spending is improving, but labor markets are still weak. Inflation is subdued but has the potential to pick up. To quote Dr. Anthony Fauci, investors have the right to be “cautiously optimistic.”

Share:
facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

RECENT POSTS

Market Commentary: Restaurants are Rebounding, but S&P Still Lags

Retail sales figures continued a string of economic data pointing toward slowing growth accompanied by a gradual reopening of state economies. Consumers seem willing to take some risks. Retail and food service sales rose 0.6% last month. (See Chart 1.) Increased sales at restaurants contrib …

Market Commentary: The S&P fell for the Second Week Straight and Inflation Rises

Stocks continued to retreat as losses on Tuesday were large enough to push the market down more than 2% for the second week in a row. The S&P 500 has retraced 6.7% of its massive rally from the lows in March.

Market Commentary: Sharp Decline in S&P 500 Could Signal More Volatility

Investors were reminded stock investing comes with volatility as the S&P 500 dropped 3.5% on Thursday and declined 2.3% for the week. The downside pressure was felt most directly by stocks that had performed best. Figure 1 shows the best performing stocks this year (furthest to the righ …

Market Commentary: Higher Inflation Expected in Coming Years, S&P Sees More Gains

The Federal Reserve announced a major policy revision last week. The revised strategy indicates rates will stay low for a long period of time and will increase slower than in past rate cycles. The report and a subsequent speech by Fed Chair Jay Powell indicate the Fed will allow inflation t …
1 2 3 26 27 28 29 30 31 32
Economic Growth

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation