President Joe Biden has signed into law the massive new federal relief package passed by the U.S. House and Senate earlier this week—a move that will inject some $1.9 trillion in stimulus support into the still-struggling U.S. economy.
The stimulus package is becoming law exactly one year after the March 11, 2020, declaration made by the World Health Organization (WHO) that the coronavirus crisis had become a bona fide pandemic.
Writing to PLANADVISER about the additional stimulus and the broader context of the U.S. and global economic recovery, Paul Eitelman, chief investment strategist for North America at Russell Investments, says 2021 could very well set a modern record for real gross domestic product (GDP) growth.
“2021 was already coming together as a year of very strong economic growth, and we expect the additional $1.9 trillion of fiscal stimulus will supercharge the recovery,” Eitelman says. “Our expectation for U.S. real GDP growth has shifted up to 7% in 2021, which would make it the best calendar-year result since 1984.”
According to data shared by Eitelman, nominal average personal income grew in the U.S. by 6% in 2020, underscoring the fact that the pandemic has had dramatically disparate impacts on different groups and communities.
“This would be a very strong outcome under normal economic circumstances and, frankly, it is a bizarro-world number for a recession year,” Eitelman observes, adding that the U.S. consumer, in the aggregate, is in far better shape today than many may have anticipated early on in the pandemic. Of course, many in the U.S. and around the world are by no means in outstanding financial shape, but Eitelman says extended unemployment benefits and another round of stimulus checks are likely to provide a helpful shot in the arm for those who are still struggling.
Zooming out, Eitelman says the new stimulus package does potentially change the thinking about when interest rates could rise, though this remains a highly vexing topic and one in which speculation can be unhelpful.
“We still expect Fed liftoff in early 2024 as an appropriate baseline,” he says. “In a best-case scenario, we believe the central bank could begin raising rates at the end of 2022, if everything goes right and inflation surges sooner than expected.”
How likely is this scenario, exactly? Eitelman says the picture is unclear.
“Vaccines, fiscal stimulus and expectations for a supercharged economic recovery have caused the cheaper and more cyclical areas of the equity market to outperform in recent months,” he says. “We see further upside for the value investment style going forward as the earnings of companies most impacted by the pandemic are likely to outperform in the reopening phase. Notably, some tech products that have been relied on during lockdowns could even face a hangover in demand as we all hopefully return to a way of life in the next few months that looks a little more like 2019 than 2020.”
Some similar comments were aired this week by David Kelly, chief global strategist at J.P. Morgan, during the firm’s introduction of the 2021 “Guide to Retirement” report. Even as the U.S. and global recoveries continue to pick up steam, Kelly says, it remains critical for retirement plan savers to diversify their portfolios and watch out for irrational exuberance.
Kelly says inflation and taxes are critical issues to consider in light of all of the monetary and fiscal stimulus that has been implemented to counter the negative impacts of the COVID-19 pandemic. Going forward, it is inevitable that returns are going to decline, he says.
Kelly suggests the $4 trillion the federal government has spent so far to counteract the pandemic will inevitably lead to higher taxes down the road. All of these factors have implications for long-term investors.
“This environment will be challenging,” he warns.
In anticipation of the full passage of the stimulus package, the investment leadership team at Winthrop Capital Management also shared some macroeconomic commentary this week.
“Our base case for 2021 remains that we expect an acceleration in GDP in the second half of 2021, and unemployment will fall sharply as demand for workers increases as the economy opens up,” says Greg Hahn, Winthrop Capital Management president and chief investment officer (CIO). “In addition, reducing the temperature on trade disputes between the United States and Europe should help economic growth of both regions.”
The Winthrop commentary observes how the rotation out of technology stocks has continued in recent weeks and will likely continue, with potentially significant volatile to boot.
“Earnings season has unofficially ended, and although expectations have been quite low all year, the historical comparisons are staggering,” Hahn says. “2020 provided us with three of the strongest earnings and revenue beat rates in history, with an average of over 75% of companies beating expectations. Additionally, guidance raises have been fairly strong. Tech provided the strongest beat rates which, given its recent underperformance due to the spike in interest rates, could help offset the extreme moves in the sector.”
According to Winthrop’s analysis, unlike in the equity and credit markets, interest rates in the U.S. have lagged behind the broader recovery.
“Inflation risks are legitimate, as Congress moves closer to and passes another round of stimulus,” Hahn says. “While it is likely that we see inflationary pressure in the near-term, we still believe it will be difficult to spark sustained inflation above 2% in the U.S.”