The economy came into March roaring like a lion, with the Institute for Supply Management (ISM) reporting an increase in the February Manufacturing Purchasing Managers’ Index (PMI), indicating expansion in the overall economy. This is the ninth consecutive month of growth for this index, in spite of absenteeism, short-term shutdowns in order to sanitize facilities, and hiring challenges related to the pandemic. In order to maintain economic momentum, the Senate approved a $1.9 trillion COVID-19 relief bill on March 8th. This legislation sends direct payments of up to $1,400 to many Americans and extends a $300 per week unemployment insurance boost until September 6th. While there are many details in this bill, it is expected to provide further stimulus to an economy already in recovery mode.
In mid-March, the Federal Open Market Committee (FOMC) voted to keep short-term interest rates near zero. Nearly one year earlier, the FOMC held emergency meetings to cut the fed funds rate to 0%, when the pandemic initially shut down the US economy. Over the past year, the Federal Reserve has added over $3 trillion to its balance sheet with financial asset purchases to sustain market liquidity. These emergency actions, coupled with more than $5 trillion in fiscal stimulus spending, have provided significant healing to the US economy. In fact, the Federal Reserve now expects Gross Domestic Product (GDP) to expand 6.5% in 2021 and 3.3% in 2022. This is quite an improvement from a year ago!
With the US economy on the road to recovery, the Biden administration is now focused on an infrastructure bill targeted at $3 trillion. This legislation is expected to take longer to debate and has long-term implications for the economy. One must look no further than the effects of a crippling winter storm that ravaged Texas and its power grid in mid-February to demonstrate the infrastructure needs in our country. This bill will more than likely be tied to individual and corporate tax increases to pay for a substantial investment in our infrastructure. We expect a contentious battle in Washington with this legislation, as politicians begin to debate the significant US federal debt accumulated during the pandemic and the need for fiscal discipline in the future.
The massive fiscal and monetary stimulus over the past year have investors concerned about inflation. This became evident when the yield on the 10-Year US Treasury recently spiked to 1.75%, up from approximately 0.9% at the beginning of the year. The quick acceleration in interest rates has created increased volatility in both the stock and bond markets. We expect volatility will remain in financial markets, as economic recovery creates inflation fears for investors. The change in the direction of interest rates is causing a rotation in many sectors of the stock market as well. For example, higher interest rates allow banks to lend money at higher rates than they pay depositors. This means banks will earn higher margins on their loan portfolios; therefore, financial stocks have performed well. On the other hand, as growth reappears in economically sensitive companies, last year’s strong performers, technology stocks, have underperformed the market year-to-date. Although earnings growth will likely continue for these technology companies, their strong financial results last year have created a headwind for comparisons this year.
While there are financial and personal challenges ahead, as of March 25th, approximately 87 million US adults have received at least one COVID-19 vaccine dose, representing over a third of adult Americans. In addition, approximately 173 million doses of COVID-19 vaccines have been delivered in the US. The momentum of vaccine distribution and inoculations has accelerated in the US, leading us to feel optimistic about life returning to some semblance of normalcy in the not-too-distant future. We hope you and your families are staying healthy and will soon be able to enjoy the great outdoors in the days and weeks ahead! As always, please feel free to contact us at 513.791.9258 (Blue Ash) or 513.863.4015 (Hamilton) or inquire about arranging a video call!
*Note: This month’s market commentary was written prior to the end of the month to provide pertinent tax filing information on a timely basis.