by Timothy D. Carkin, CAIA, CMT
Senior Vice President
This week marks the one-year anniversary of the World Health Organization declaring the COVID-19 virus a pandemic. Since then, we have seen the largest economy in the world locked down, a massive spike in unemployment and the shortest economic recession on record, quickly followed by double-digit GDP growth. To say the least, the pandemic has disrupted almost every facet of daily life. Anniversaries are great times to reflect on what has come and gone but it may better to use as a lens to look forward. This week prospects for the economy improved with President Biden signing the $1.9 trillion stimulus bill. As early as this weekend, stimulus checks will be arriving in bank accounts. In addition, President Biden said every adult in the country should be eligible for a vaccine by May 1. Treasury Secretary Yellen said that this legislation was a pivotal day for the economy and would speed the recovery. This latest fiscal stimulus package brings the total in the last year to $5.1 trillion and through the end of 2021 roughly 21 percent of GDP, distributed. As you can see in the chart below, this stimulus dwarfs the fiscal efforts exiting the Great Financial Crisis and doesn’t even count the massive monetary stimulus and quantitative easing across the globe.
As we’ve seen in the past, stimulus checks can act like a strong cup of coffee for the economy, spiking sales and services numbers just to have them revert to prior levels when the buzz wears off. There will be $400 billion in stimulus working its way through the system just as states are starting to open up and loosen restrictions. It’s worth noting that the next few quarters might show some economic indicators running “hot.” The question on everyone’s mind is how much of that buzz wears off and how much translates into inflation, but it is our view that there is not a risk of persistent elevated inflation on the horizon.
As we mark the anniversary of the pandemic it is worth pointing out that equity indices set record highs and Treasury rates sit at pandemic highs of 1.6 percent. Throughout the pandemic both bonds and equites have made headlines: stocks fell 34 percent, the 10-year U.S. Treasury dropped as low as 0.58 percent. The rally from those levels has been spectacular. But it’s their tandem move that is hopeful. It’s no coincidence that the S&P 500 set its all- time high the day the stimulus package was signed. The economic picture in the U.S. is looking better, which has investors selling their Treasuries and moving into riskier assets. Last year we added to equities at the expense of our bond allocation. We believe the climb in rates to more “normal” levels should be a signal of a strong economy and a healthy equity market.
Week in Review and our Takeaways:
President Biden signed into law a $1.9 trillion stimulus bill, $400 billion of which will be arriving in bank accounts this month
Equities and bond rates sit at pandemic highs as the economy continues to open