The United States economic outlook has “clearly brightened,” according to Federal Reserve Chair Jerome Powell. The Washington Post also states that the U.S. emerges as the main engine for global economic recovery as jobs spike and stimulus cash is spent, mainly on goods imported from other countries. This should help buoy a global recovery but could also increase our trade deficit.
Three rounds of stimulus checks, increased corporate earnings and a bull market well underway are fueling significant economic gains in the U.S.
Unemployment is improving, gross domestic product (GDP) is escalating, and many businesses are reopening. There is no doubt some businesses and jobs are gone for good, but the ability to rebound in the midst of a pandemic is something apparently only America can do so far in 2021. China led the recovery in 2020 as the first to reopen their economy after the pandemic.
The economy as a whole seems to be thriving on unprecedented stimulus, continued low interest rates and widely anticipated increase in real GDP to 6.5 percent this year.¹ Most economists warn this could lead to higher inflation as well.
Investors are enjoying this earnings season, where, so far, a record 87% of S&P 500 companies have beat earnings estimates, and earnings look to be growing by more than 46 percent, according to Refinitiv. There may be a hangover of increased federal deficit, a higher trade deficit and rising costs and interest rates. But, for now, investors are cashing in on equities and pushing off inflation fears until later.
Manufacturing activity, according to the Institute of Supply Management (ISM), hit its fastest pace since 1983 in March, while the U.S. service sector continued to see solid improvement in activity.
The trends in new COVID-19 cases and deaths were moving in a favorable direction, though variants remain a potential unknown and there were renewed lockdowns in Europe and India. Nevertheless, the global economic trends provided a positive backdrop for stocks. Opposite of last year, when a few large tech names led the way, so far this year, value-oriented stocks outperformed growth stocks and small caps topped large caps.
Brett Lapierre, senior investment strategist with Mariner Wealth Advisors, states that U.S. equity markets continue to operate in a favorable backdrop amid accelerating economic and earnings growth and an accommodative central bank. Equity markets can generally handle a steady and modest rise in interest rates if this happens for the right reasons such as faster economic growth. But if rates rise too quickly nervousness can appear. Inflation worries can also hurt equity prices, particularly when valuations are elevated.
Jeff Krumpelman, chief investment strategist for Mariner Wealth Advisors, has pointed out that there remain few signs that markets are in bubble territory. He wouldn't be surprised if we see a correction or sideways market over the next few months, which could prove to be a healthy development.
Looking ahead, Lapierre expects above-average economic growth and higher inflation over the next several months. He sees the acceleration in inflation as temporary, giving the Fed some wiggle room before having to lift short-term interest rates. Risks to this outlook include a period of higher inflation lasting longer, the potential for tax increases to shorten the economic rebound and the potential for COVID-19's impact to linger.
1. The Federal Reserve
Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors, an SEC Registered Investment Adviser. Please visit www.marinerwealthadvisors.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Suite 500, Overland Park, KS 66211.
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