Could the U.S. economy grow by 7% this year?

On a special, blog–only edition of Market Week in Review, Senior Portfolio Manager Megan Roach discussed the latest developments pertaining to COVID–19 relief measures, including the American Rescue Plan and the European Central Bank (ECB)’s Pandemic Emergency Purchase Program. She also provided an update on U.S. inflation and equity–market performance.

Growth expectations rise as U.S. passes pandemic relief bill

March 11 marked the one–year anniversary of the World Health Organization’s declaration of the COVID–19 outbreak as a global pandemic, Roach noted, adding that after a year of tremendous hardship and loss, there appears to be some light at the end of the tunnel.

“U.S. COVID–19 infections are continuing to decline from their January peak, with the country recording its first full week with fewer than 70,000 average daily cases since mid–October,” she stated. In addition, the nation’s vaccination efforts have stepped up considerably over the past month, with the U.S. now administering over 2 million doses a day on average, Roach said. The increase in COVID–19 vaccinations comes amid President Joe Biden’s March 11 announcement that all U.S. adults will be eligible to receive the vaccine by May 1, she added.

The president also recently signed into law the nation’s third fiscal stimulus package since the coronavirus crisis erupted: the US$1.9 trillion American Rescue Plan. The legislation, which includes US$1,400 stimulus checks, an extension of federal unemployment benefits and US$350 billion in state and local government aid, is expected to supercharge the country’s economic recovery, Roach said. “U.S. real GDP (gross domestic product) growth could near 7% this year, which would make for the nation’s highest growth rate in a calendar year since 1984,” she remarked.

In a sign of the economic recovery taking hold, Roach noted that new numbers from the Transportation Security Administration show a recent uptick in air travel, with an average of more than 1 million passengers per day taking to the skies the first week of March. “This is the highest non–holiday total observed since the start of the pandemic,” she remarked. Roach added that the number of travel bookings 90 or more days into the future is also starting to accelerate, which she said is a sign of increasing confidence among Americans that they’ll be able to take vacations again soon.

ECB keeps interest rates unchanged, pledges increase in bond purchases

Turning to Europe, Roach noted that markets were very tuned into whether the ECB would maintain its ultra–accommodative policies, despite the recent increase in eurozone yields, during the central bank’s March 11 policy meeting.

“The ECB’s announcement that interest rates and the overall size of its €1.85 trillion bond–buying program would remain unchanged proved to be reassuring to markets, in addition to the central bank’s formal commitment to significantly increase the pace of its bond purchases in the coming months,” she stated. The step–up in purchases will be undertaken with the aim of preventing a tightening in financial conditions that could derail the region’s recovery, she noted. Roach added that recent decisions by the Bank of Australia and the Bank of Canada have also reinforced the view that global central banks are likely to remain dovish for quite some time—perhaps well into the expansion.

U.S. consumer prices point to muted inflation

Switching to the latest economic data, Roach noted that there’s quite a bit of variability in the numbers from around the world as different regions transition to different stages of reopening. Key takeaways from the week of March 8 include a decline in both German industrial production and Japanese household spending, increasing consumer confidence in Australia and a rise in U.S. small–business optimism, she said. In addition, February’s U.S. employment report is indicative of more job openings and increased voluntary turnover—a sign of greater confidence in the overall recovery, Roach explained.

One of the more significant data points of the week pertained to U.S. inflation, she noted. “The Labor Department’s core consumer price index (CPI) for February—which excludes volatile food and gas prices—increased by 0.1% from January and 1.3% on a year–over–year basis, which shows that inflation still appears fairly tame,” Roach stated.

She added that, despite the modest inflation numbers from the past few months, headline inflation is likely to rise somewhat dramatically over the next few months, primarily due to the base effects of very low readings from last March and April. Because of this, Roach doesn’t expect the U.S. Federal Reserve or markets to become too concerned.

Value stocks outperform growth stocks again

Equity markets performed solidly the week of March 8, Roach said, with global developed equities rising roughly 2% to 3% as of midday Pacific time on March 12. Many broad equity benchmarks, such as the S&P 500® Index and the Dow Jones Industrial Average, logged all–time highs, she noted.

U.S. small cap stocks in particular enjoyed another banner week, Roach said, due in large part to the passage of the American Rescue Plan. “These companies are particularly sensitive to the increased expectations for consumer spending that the new relief bill brings,” she stated, adding that small caps rose approximately 6% on the week.

Peering under the hood further, Roach noted that style leadership within equity markets was especially wild the week of March 8, with a tug–of–war between growth (i.e., technology and momentum stocks) and value (i.e., reopening, financials and energy stocks) as investors digested and calibrated their expectations around equity market valuations, fiscal stimulus, interest rates and inflation.

“Leadership whipsawed between growth and value nearly every day,” she remarked, noting that the Nasdaq 100 Index fell into correction territory on March 8, before mounting a pair of meaningful comeback attempts in the following days amid a decline in U.S. government bond yields. Ultimately, value stocks notched yet another weekly win over growth stocks, she said, with the yield on the benchmark U.S. 10–year Treasury note relatively unchanged from the start of the week.