Last quarter, we talked about how the emerging post-COVID economy was picking up steam. We’re happy to report momentum continues to grow and economic activity on most fronts continues to show improvement. As always, we encourage readers to watch several vital signs that are essential to a healthy economy. Here are update on a few of them:
Jobs, Jobs, Jobs
On the labor front, the US added 916,000 jobs in March according to the Bureau of Labor Statistics. That’s more than January and February combined. The unemployment rate now sits at 6%. While its not as good as the 3.5% rate we saw pre-COVID, it is a far sight better than the 14%+ we saw during the darkest days of 2020. We expect the numbers will continue to improve as COVID takes a back seat in terms of headlines over the next few months.
Probably the simplest indicator of economic growth is the ISM Manufacturing Index. This Index reflects output from companies that make stuff. Any reading over 50 indicates economic expansion, and anything under that number reflects contraction. In March, the ISM reading jumped from 60.8 to 64.7, the highest reading since 1983.
Household Net Worth
The Federal Reserve reported that household net worth (assets minus liabilities) stood at $130 trillion at the end of 2020. That was up 10% from the end of 2019. Net worth was largely boosted by gains from stock and real estate markets.
Employment is booming, companies are making more stuff, and people are buying more of it because they have the financial ability to do so.
Stock markets, both domestic and international, continued to advance in the first quarter. Here is a snapshot of major index returns for the quarter:
As we continue to remind readers, investment performance is a reflection of everyone’s expectations for the economy going forward. As pent-up demand for everything from travel to leisure continues to grow (and people have the financial means to afford it), we would expect corporate earnings and profits to grow as well.
While Europe is a bit behind in terms of vaccinations and is still experiencing COVID surges in select countries, we expect they will make significant progress over the summer months. Markets overseas are reflecting this.
Remember, the S&P 500 had double digit returns in 2019 and 2020, and the historical likelihood for a “three-peat” is very low, although this doesn’t mean globally diversified portfolios can’t still have a good year.
So What Worries Us?
No matter how rosy the picture looks, there are always storm clouds lurking somewhere. Here are a few things to keep your eyes on:
We’ve been carefully watching the rise in interest rates over the past quarter. While it is too early to tell whether we’ll see a meaningful increase, rising rates can be worrisome for the stock market. (When interest rates rise high enough, people are willing to trade owning stocks for a risk-free return.) The Federal Reserve remains committed to keeping interest rates low as the economy continues to heal, and Fed Chair Powell believes the rise in rates simply reflects the optimism people have for the economic recovery from the COVID slump. And remember, we’re talking about interest rates increasing from zero. So historically speaking, we’re still in one of the lowest rate environments in the past century. No one would have complained about a 3.5% mortgage rate in 1980. While rates may trend upward a bit, there is not much evidence at this time to suggest we need to be too concerned about it until 2022.
The Biden administration rolled out the American Recovery Act and now they are trying to roll out their bold $2.5 trillion proposal for an infrastructure plan funded by corporate and individual tax increases. We won’t spend a lot of time on the details of the proposal here because it’s a long way from enactment.
In case you missed it, Chris posted an article on the potential changes to tax policy on our blog recently.
Yes, Democrats have a slim majority in Congress -at least until the mid-term elections. But the Infrastructure proposal has little chance (in our view) of garnering enough support from both parties in its current form to be approved. At the earliest, we may see some revised version of the plan and a revision to the tax code to pay for it in late summer. We fully expect there will be tax increases when the sausage finally gets made, but we won’t worry a great deal about it at this early stage. Once a deal gets done, we will address how readers can manage and mitigate any tax impact. So stay tuned.
Much has been made about inflation rearing its ugly head again after a 20-year slumber. We don’t get it. Yes, the cost of things has increased somewhat. But much like interest rates, the increases come off of very low baselines from a historical perspective. With the Fed committed to keeping interest rates low through 2022, we believe inflation will remain relatively tame as well – at least through this business cycle. The powerful combination of technological advances, productivity increases, and the rise of alternative energy should help keep inflation at manageable levels for the time being.
In closing, the current environment has much more positives than negatives, and we remain optimistic for a decent year for investors. We will be closely watching Congressional progress on the latest stimulus plan over the coming weeks and into the summer, and keep you updated here. Until then, we advise investors to stay the course. See you next quarter.
Your First Coast Advisors Team