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I periodically walk into stores to get a sense of how the U.S. economy is doing. This past weekend I walked into a car dealership in my area. I chatted with a car salesman who has worked in the industry for more than 50 years. He shared that this is a very strange economic environment – car purchases have increased (he had already sold four cars that day), but so have the number of people stopping by to see if there are any job openings, who say they’ve been out of work for six or nine months. This is emblematic of the “K-shaped” recovery we’re in – some have seen their financial fortunes improve during the pandemic while others have seen their financial situation deteriorate. However, I will reiterate what I’ve said before: I’m extremely positive about the U.S. economic recovery. I believe it will be far more robust and inclusive than recent recoveries. Here are the reasons.
In past crises, especially the global financial crisis, the recovery depended on slowly building confidence over time, in order to induce companies and households to spend. This crisis is very different. The economic shutdown was forced upon people, many of whom are looking forward to being able to spend again as economies open up. We’re not seeing the lack of confidence that we typically see in recessions – businesses and households are just waiting for the mass distribution of vaccines, which I believe will provide the only confidence needed for the economic recovery to accelerate significantly.
The distribution of vaccines in the U.S. has been impressive. In just the last week, the Biden administration has moved up the timeline twice on when all American adults can expect to be eligible to be vaccinated. This suggests the U.S. could reach herd immunity this summer.
Last week, the U.S. Federal Reserve (Fed) reported that household net worth as of year-end 2020 was more than $130 trillion – $12 trillion more than it was in 2019.1 In other words, household net worth grew 10% during the pandemic as many Americans – the upper leg of the K-shaped recovery – saw their financial prospects improve during the crisis. This means they have available money to spend when the U.S. economy fully re-opens.
Last week also saw the most recent U.S. stimulus package signed into law. This should be a positive for many Americans on the lower leg of the K-shaped recovery – in other words, those most negatively impacted by the pandemic. This $1.9 trillion stimulus package should also help make the economic rebound in the back half of 2021 more robust.
The stimulus package is a short-term fix; those on the lower leg of the K-shaped recovery will need jobs for the recovery to be sustainable. It seems that companies have already begun to hire in advance of a broad re-opening of the economy; as we saw in the February employment situation report, non-farm payrolls grew by 379,000, with most of the hiring coming from areas hard hit by the pandemic, such as travel and leisure.2 And it seems companies plan to hire more. The National Federation of Independent Business’s monthly jobs report for February indicates a net 18% of small business owners are planning to create new jobs in the next three months.3
The University of Michigan Consumer Sentiment Index preliminary reading for March rose to 83, the highest level it has been at since the pandemic began.4 According to Surveys of Consumers Chief Economist Richard Curtin, “consumer sentiment rose in early March to its highest level in a year due to the growing number of vaccinations as well as the widely anticipated passage of Biden’s relief measures…”. Consumer expectations in particular rose substantially, suggesting excitement over the re-opening of the economy.
I know I have said it before, but it bears repeating – there’s a lot of money waiting to be spent. Anyone who has been in New York City during Fleet Week knows what pent-up demand looks like – sailors enjoying all that New York City has to offer after a long time on a boat. Well, what we have now with the pandemic is pent-up demand on steroids. A long-time friend is a financial professional, and she recently shared that every day she has conversations with her high-net-worth clients where they tell her they have stockpiled a lot of cash and are waiting eagerly to be vaccinated so they can start enjoying life again – going to a restaurant, shopping in a mall, getting on a plane. I suspect this spending spree may go on throughout the back half of 2021, if not longer.
In short, all the ingredients of a strong recovery are present – Americans are ready, willing, and able to spend. Now, there are risks to this very positive economic outlook, but I believe they are relatively low. A surge in Covid-19 infections could delay the re-opening of the economy for a while, and the development of mutations that are not protected against by current vaccines could derail the recovery altogether.
We’ve already seen a strong rally in U.S. stocks since the lows of the pandemic. So why am I so positive on them? Simply put, I believe they still have legs.
There are certainly risks to my positive outlook on the U.S. stock market: specifically valuations and long rates.
Yes, valuations for the S&P 500 Index are higher than their historical average. Specifically, the forward 12-month price-to-earnings (P/E) ratio of 21.9 is higher than the 5-year average of 17.7 and the 10-year average of 15.8.5 However, it is below its year-end 2020 level of 22.5.5 And in 2021, earnings expectations have been outpacing the rise in stock prices. It’s important to note that since year end, the S&P 500 Index (price index) has increased by 4.9%, while the forward 12-month earnings per share estimate has increased by 7.7%.5 It’s also worth noting that valuations have rarely been predictive of performance in the near term.
In terms of the 10-year U.S. Treasury yield, there’s always a good chance it could move higher in such a strong economy. Some have argued that if it hits the 2% level, it would cause problems for stocks. A 2% yield is certainly possible in what I expect to be a strong economy, but I think that would only create a very short-term headwind for stocks as they digest the change. And, as I have said before, there is also the possibility of Fed intervention to lower long-term interest rates. Just last week the European Central Bank announced that it would increase asset purchases, although it is not technically yield curve control.
This level of optimism isn’t a place I arrived at lightly. It’s a view that was enabled by a massive scientific and logistical endeavour to develop and deliver a Covid-19 vaccine, a political push to provide multiple rounds of stimulus, and a central bank commitment to remain patient and accommodative. Since the beginning of the crisis, I’ve advocated for a multi-pronged approach to combating the crisis, and I believe we’re about to see the benefits.
Kristina Hooper is Global Market Strategist at Invesco.
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Notes
1. Source: Federal Reserve Board. Household net worth defined by total assets minus liabilities.
2. Source: U.S. Department of Labor, Bureau of Labor Statistics, March 5, 2021.
3. Source: NFIB, February 2021 Jobs Report.
4. Source: University of Michigan, as of March 12, 2021.
5. Source: FactSet Research Systems, as of March 12, 2021.
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All figures are in USD
There is no guarantee forecasts will come to pass.
Forward price-to-earnings ratio is a variant of a company’s price-to-earnings ratio, and is calculated by dividing the company’s current share price by its expected earnings, usually for the next 12 months or next full fiscal year.
Earnings per share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.
The University of Michigan’s Consumer Sentiment Index is published monthly, based on a telephone survey designed to assess U.S. consumer expectations for the economy and their personal spending.
The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.
A price index only calculates the capital gains or losses of the securities in an index. In comparison, a total return index also incorporates dividends and other cash payments.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.
Operation Twist was a U.S. Federal Reserve monetary policy tool designed to lower long-term interest rates by selling shorter-dated Treasuries and buying longer-dated ones.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Disclaimer
© 2021 by Invesco Canada Ltd. Reprinted with permission.
The opinions referenced above are those of the author as of March 15, 2021. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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