Economy Poised for Strongest Growth in Nearly 40 Years
Households in better financial shape than before pandemic
Additional fiscal support is on the way
Further stock gains likely to be gradual
This past March marked the one-year anniversary of the moment when a novel, little-understood virus brought daily life to a standstill and triggered the deepest economic contraction since the Second World War. Yet, barely 12 months later, the U.S. economy is poised to record its strongest period of growth in nearly four decades. It may be too early to declare victory against COVID-19, but significant progress in that battle has been made and for the first time in a long time a return to more normal life doesn’t look too far off.
The biggest development over the past three months has come on the vaccine front, where efforts have exceeded all expectations and the U.S. continues to outpace the world. At a current pace of close to 3 million shots a day, herd immunity is potentially within reach by early summer. Already, 42% of the adult population in the U.S. has received at least one vaccine dose, allowing an increasing number of states to lift almost all restrictions on activity and mobility trends to recover to early-pandemic levels.
The other great success story of this crisis has been the actions of government officials in backstopping markets and providing a fiscal lifeline to businesses and households through direct payments, forgivable loans and many other measures. Although the hardships brought about by the pandemic are still very real and ongoing, it is encouraging to see how limited the signs of long-term economic damage have been, and we expect that this recovery will be faster and more durable as a result.
So far, Washington has passed $5 trillion in fiscal stimulus packages to fight the pandemic and mitigate its economic impact, including last month’s $1.9 trillion American Rescue Plan. Massive stimulus has not only helped avert the cascade of business failures that would normally accompany such a severe economic downturn but has also allowed consumers to accumulate plenty of savings, leaving aggregate household balance sheets, believe it or not, in a stronger position than they were pre-pandemic.
Together, this should help propel future spending, investment and earnings growth as the economy continues to reopen. And more fiscal support is on the way, with two big spending bills likely to be passed later this year. If well executed, the Biden administration's American Jobs and Families Plans have the potential to modestly boost long-term economic output. Higher taxes to pay for these programs are likely, a modest negative for the economy and corporate profits in the near term as their impact will be felt more immediately and quickly priced in by the market, but the stimulus spending will be spread out over a decade, providing a persistent tailwind to growth and earnings.
With greater confidence in the outlook, our client portfolios are now positioned for a post-pandemic expansion we suspect will last for several years. A successful vaccination rollout, faster reopening schedule, and larger-than-expected stimulus all point to strengthening growth prospects for the U.S. economy relative to where things stood just three months ago. However, markets have gone through an unusually swift recovery over the past year, and we believe investors have incorporated most of the coming economic acceleration into current prices.
This means gains from here are likely to be more gradual and that the stock market could face near-term headwinds caused by the economy’s better-than-expected recovery, including higher interest rates that will weigh on valuations, concerns that the Fed may tighten earlier than expected, and the potential for higher taxes. There are also some signs of froth in segments of the market as stock prices have essentially moved in a straight line higher since last February’s lows. While we don’t think any of these concerns will undermine long-run prospects for this still young bull market, we also know that stocks do not move up in a straight line forever and that volatility is inevitable.