The middle of March marks the one-year anniversary of the transition to the world with COVID. At this time last year, very few of us could have predicted the social, emotional and economic impact the virus would bring over the next 12 months. Little did we know that the cancellation of the NCAA tournament was just the beginning of things to come.
Fast forward 12 months, and we are finally starting to see evidence that the needle is moving in the right direction. The news on the vaccine front has been both positive and well documented. Just in the past 30 days, the projected timeline to achieve two-dose vaccination of 75% of Americans has dropped from 11 months to 6 months, according to Cornerstone Macro. Key health metrics are moving in the right direction, and the economy is slowly beginning to open.
On the economic growth front, the recently passed $1.9 trillion COVID Relief Bill exceeded investors’ expectations in both size and scope. To put this into perspective, the package represents roughly 8.8% of annual GDP in the U.S. However, keep in mind this round is only a small portion of the stimulus. Total fiscal and monetary support throughout the pandemic has been roughly 57% of annual GDP, which is simply massive.
Thanks to both stimulus and the natural reopening of the economy, consensus expectations for economic growth is now in the 5-6% range in the first half of 2021. We believe the number could be even stronger, representing the highest growth in the U.S. economy since 1983.
Interest rates & inflation
Treasury bond market participants certainly haven’t failed to notice the expected increase in the economic growth rate. While the Federal Reserve has clearly stated that short term rates will remain lower for longer, the longer-maturity yields have increased significantly since the beginning of the year.
The 10-year treasury bond started 2021 at roughly 0.9% yield and jumped to over 1.7% by mid-March. Recent guidance from the Fed indicates that the Fed funds rate will not be increasing until 2023. The futures market is pricing in the possibility of an increase later in 2022.
Has the additional time spent in your home office led you to work on a renovation or think of a new home? You’re certainly not alone. The recent lumber shortage is just one example of bottlenecks in the supply chain that have arisen during COVID. Lumber prices have increased more than 125% since mid-2020. As the economy reopens, we anticipate that inflation will be on the rise as well. However, Fed guidance indicates policymakers’ belief that higher inflation will be temporary in 2021—to then receding again in 2022 to the Fed’s stated 2% target level. Our beliefs are consistent with this view.
Following a 12-month stretch that has been full of challenges, the economy finally seems poised for a strong recovery in 2021. Accommodative fiscal and monetary policies, along with an improving health landscape should all contribute to the rebound. The growth has come at a significant cost, and the longer-term policy impact will certainly be a topic of debate throughout the recovery.
For now, let’s hope the NCAA tournament is just the beginning of our return to normal.