Week in Review: March 12, 2021 

Another Shot in the Arm for the Economy

U.S. equity indexes closed the week higher, as accelerating vaccinations and the passage of a $1.9 trillion pandemic relief stimulus package brightened investors’ economic outlook for the year. However, market participants experienced higher volatility on Friday as expectations for stronger growth and inflation sent the 10-year government bond yield — which moves inversely to bond prices — back above 1.6% and on track to rise for the seventh straight week. Treasury yields — which had taken a slight breather from their upward trend earlier this week — were also supported by encouraging vaccination news after President Biden stated that all adults would be eligible for a coronavirus vaccine by May, raising the probability that business activity would accelerate in the summer as conditions normalized. However, we believe that more infectious mutations of the virus remain a key risk to the brighter economic outlook given that new strains could become more resistant to vaccines, adding to the threat of new outbreaks as they become more prevalent. While COVID-19 metrics have materially improved in recent weeks, they are still at extremely high levels, and we could see some deterioration in health conditions if governments lift businesses’ capacity restrictions too fast. Nevertheless, we forecast the U.S. economy to grow between 6.5% and 7% this year, boosted by the new stimulus injection. 

On the economic front, the University of Michigan’s preliminary reading of consumer sentiment in March rose to 83.0 from 76.8 in February, beating economists’ expectations and reaching its highest level since the pandemic’s onset (see Figure 1). The improvement in Americans’ sentiment was underpinned by prospects of stronger economic activity in the months to come, improving health conditions, accelerating vaccine delivery and the imminent arrival of $1,400 stimulus payments to some households. We believe that the report supports the case for a robust rebound in consumer spending during the year ahead, particularly across the services sector and the retail sector, which were the hardest hit by lockdowns and business shutdowns in 2020. Looking forward, we also believe that consumer attitudes will continue to improve as vaccinations quell the health crisis and business restrictions abate. Furthermore, lower-income households will benefit the most from substantial fiscal transfers allotted from the American Rescue Plan and firming jobs growth in hard-hit service industries. Meanwhile, higher-income households are expected to also increase spending after saving most of their disposable income last year.

Meanwhile, the latest consumer price index (CPI) report provided evidence that outside of another buoyant advance in energy prices in February, consumer price inflation remains tame. While headline consumer prices rose a strong 0.4% last month, core CPI — which strips out the prices of volatile categories such as food and energy — advanced a more modest 0.1%. Compared to a year ago, overall CPI accelerated to 1.7% from 1.4% in January. In contrast, the producer price index — which measures prices paid to American producers — saw its largest increase in February since October 2018 (see Figure 2). The escalation in producer prices, however, was partly attributed to a continued surge in energy prices, which rose by 6% in February after increasing by 5% in January. While underlying price pressures are projected to strengthen in the coming months amid a healthier, fiscally stimulated economy and strong base effects, we believe that higher inflation will be transitory. Lingering slack in the labor market is likely to be a counterweight that will prevent inflation from spiraling out of control.

Across the pond, European equities rallied on Thursday following the European Central Bank’s (ECB’s) announcement that it would keep the size of its Pandemic Emergency Purchase Program (PEPP) unchanged but would accelerate the pace of its bond purchases next quarter. The ECB’s message reassured markets that an accommodative monetary landscape would be maintained, sending European bond yields lower. Bond yields in the eurozone have increased at a rapid pace since February, after U.S. President Biden announced a massive fiscal stimulus plan, which brightened the global economic outlook and rekindled expectations for higher inflation. The swift uptick in long-dated government yields across several developed markets ignited concerns that rising yields could weigh on economic recovery in Europe by raising borrowing costs for countries already struggling with the coronavirus crisis. 

While some European economic indicators have continued to trail the U.S., we believe that the difference reflects both the more stringent European pandemic restrictions and the more generous American fiscal aid. Various European governments, especially outside of Germany, have been comparatively more conservative expanding their deficits than the U.S., which exceeded $1 trillion in the first five months of fiscal 2021. Ultimately, we believe that eurozone economies will undergo a catch-up phase later this year once the pandemic recedes and economies reopen, which will likely act as a tailwind for those markets. Therefore, we maintain a constructive view on European securities amid the expected acceleration in the second half of 2021. Looking at the broader equity market, we believe that the economic reopening, coupled with additional fiscal stimulus, will continue accelerating the rotation into more cyclical sectors of the market, which we believe will outperform their growth counterparts this year. As a result, we see compelling investment opportunities across small-cap and international equities, including developed and emerging markets.

Figure 1: University of Michigan U.S. consumer sentiment index

Source: Thomson Reuters (as of March 12, 2021)

Figure 2: U.S. producer price index (PPI)

Year-over-year

Source: Thomson Reuters (as of March 12, 2021)

Market Returns (USD) as of 3/12/2021

Market Levels