Market Update March 2021 – Someone Tell Savings There Was A Recession 

CAPITAL MARKETS

“Recovery” has certainly been the word of the day for several months now and the equity markets have responded by moving higher on these expectations, without waiting for the economy to fully reopen.  As the sting of the pandemic continues to recede, the market has moved from “rebound” to making new highs while the recovery looks to be further supported by the new administration’s inaugural stimulus package.  (yes, the word “inaugural” does imply more to come …)  While this has been controversial, particularly down party lines, for investors it is an important variable in preparing for the next market phase.

This economic recovery has been setting itself up for months, although it was anything but certain during the first half of 2020. But, in hindsight, “No pain, no gain” may be the mantra for this era as the swift response by many businesses to pullback during the early months of the pandemic has certainly helped to position them to quickly ramp up their respective businesses as economic activity gains momentum.

While the path is improving, authorities must be careful on how they go about seeing the economy through from here on out.  And certain risks still exist that could short circuit the follow-through, one of which being the relationship between interest rates and the broader capital markets.  It stands to reason that growing economic activity would naturally influence prices higher, typically coinciding with higher interest rates.  On the one hand, this is an acknowledgement of improving global economic conditions and the to-be-expected attendant rise in interest rates.  However, while rising rates support the stock market’s optimism, it also will impact prices/costs, which could dampen earnings growth, should higher prices slow demand from its current rate.

For bond markets, the speed at which interest rates rise can have as significant an impact as the magnitude of change.  Too fast and the asset class typically associated with relative stability may begin to show losses which, potentially could negatively impact the broader markets.  Where does that leave us today?  Although it could be problematic if intermediate and longer-term US Treasury rates were to continue their ascent, current levels have now raised expectations of growing demand from foreign buyers.  This increased demand could serve as a powerful catalyst to aid in slowing, or stabilizing, rising interest rates.

And a stabilization in interest rates would set the stage for the next leg up in equity markets where further evidence of improving fundamentals continues to mount.  From employment to manufacturing to productivity, the pandemic-driven decline looks to be rebounding at a rate exceeding expectations.  This economic tailwind and the associated expectations of further earnings growth are a powerful story in the near term.  Combined with the new administration’s inaugural stimulus package, of which a certain amount will likely be directed by recipients directly into the capital markets, there remains a reasonable case for continued equity gains in the near term.

CHART OF INTEREST – Someone Tell Savings There Was A Recession 

The idea in 2020-2021 that “this time is different” seems to apply in many ways, despite the common warning against using this phrase.  But the pandemic-driven recession has indeed had numerous datapoints that flew in the face of the traditional recession characteristics.  Certainly, the speed of the decline and recovery (so far) are hard to match with prior recessions as deep as this one has been.  And plenty has been said about the unprecedented actions of monetary and fiscal authorities. 

But the feature that most stands out is clearly the unexpected jump in US Personal Savings (as defined by the Bureau of Economic analysis) during this recession.  And it seems to be counter-intuitive that this recession would see such a surge in savings.  Yet, the chart below shows how historically unprecedented this event has been, particularly during a period with such high levels of job losses.

The chart displays US Personal Savings since 1960, with recessions highlighted in red.  Not much of an explanation is required to see how unique this period’s savings growth has been.  But why?  The two main factors have been the abrupt shut down, which quickly curtailed spending, coupled with the stimulus measures of fiscal and monetary authorities.  Or said differently, increased supply of liquidity has met a reluctance to spend, which is intuitive given the heightened levels of uncertainty during this time. 

While we don’t know with certainty what the consequences may be as this era continues, the odds of a deeper, persistent recession are certainly in decline and the “patient” looks to have been saved.  And now we will begin to see how the rehab will play out.

 

 

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