skip to Main Content

First Quarter Investment and Economic Outlook 2021

  • News
Download

New Government Spending Programs

The Administration’s $2-3 trillion infrastructure plan underlines their seeming belief that big government, not private industry can better lead big projects. That plan will shortly be followed by a roughly $1 trillion-dollar American Families Plan, which will focus more on what the administration sees as critical social needs in education and healthcare the spending for both programs will total approximately $4 trillion over 8-10 years, financed in part with proposed higher tax rates as well as increased federal debt.

Bigger U.S. GDP in 2022 Than Pre-Pandemic

With the flood of spending this year from the most recent two rounds of Covid relief programs combined with vaccinations reaching over 3 million daily, economists seem to be trying to outdo each other in raising their economic forecasts. Using a conservative forecast from the IMF, the American economy in 2022 will reach a level 6% greater than that experienced in 2019. In comparison, Europe will likely be back to 2019 levels (see Figure 1.)

More Than U.S. – A Strong Global Recovery

Historically, South Korean exports provided a leading indicator of global growth. If that still holds, their recent March export numbers suggest a very strong global recovery seems likely. Korean exports in March jumped 16.6% from a year earlier. Supporting that conclusion, the IMF recently upgraded its forecasts for global growth (See Figure 2.) With growing supplies of vaccine, it would seem likely the U.S. will begin exporting vaccines to less developed countries, such as Mexico, to further support global economic growth.

Service Industry Recovery Key to Employment Growth

Now Happening – Forecasts May Underestimate “BOOM”

Many economists now call the outlook for the remainder of the year a “boom.” With vaccines now flowing, the service economy will particularly “boom” as consumers reduce their concerns about leaving their caves to mingle with other consumers. ISM services index recently reached its highest level on record last month – beating economists’ forecasts (see Figure 3.) With service industry employment decimated during the pandemic, its recovery will prove key to employment growth (See Figure 4.) As evidence, nearly half of the 1.4 million jobs created in February and March originated in leisure and hospitality services. With both the “unprecedented” pandemic followed by a “boom,” not only will economists likely underestimate the recovery’s strength so will analysts’ earnings forecasts (consensus S&P 500 2021 earnings forecast +25%.) That shortfall will likely prove particularly beneficial for cyclical/value stocks.

How Far Economic Momentum Carries into 2022

Key to Market Outlook – Greater Market Volatility May Result

As we move into late summer months, investors will try to judge how far the momentum from this year will carry into 2022. Figure 5 shows estimates for the most recent Covid relief spending package’s impact on quarterly GDP growth. Those estimates show the economic impact will ebb early next year. At the same time, the Fed will still keep its highly accommodative monetary policies in place to maintain economic momentum. The uncertainty as to how far the momentum will carry into next year will likely lead to broader dispersion of 2022 economic and earnings estimates. Therefore, greater market volatility will likely result this fall.

Fed’s New Framework Will Attempt to Fully Maximize Employment Levels

Markets May Underestimate This Focus

In 2022, the economic momentum will likely reflect reduced new fiscal spending support as well as higher taxes (See Figure 6.) As the economy transitions to a more normal recovery, the Fed will more clearly show its new framework which focuses on a broad-based and inclusive concept of maximum employment. Fed Governor Lael Brainard said the new framework “seeks to eliminate shortfalls of employment from its maximum level; in contrast, the previous approach called for policy to minimize deviations when employment is too high or too low.” With this new framework, the Fed will use a broad range of employment measures to determine maximum employment levels. Until and unless inflation forces the Fed to pullback, the Fed will strongly support an economy that can bring broad-based unemployment measures below levels previously experienced. In our view, investors underestimate the importance of this framework change on the economic outlook.

A New Fed Chair?

Chair Powell’s term ends February 2022. At this point, it seems likely he will be renominated for that position. At the same time, with the Fed gradually moving somewhat past its dual full employment and stable price mandates, perhaps a progressive administration will look for a chair more fully committed to its agenda.

Investment Conclusions

Earnings – Market Key

Last year stocks benefitted primarily from multiple expansion rather than earnings growth. In 2021, equity market performance will likely depend more on EPS growth rather than multiple expansion (see Figure 7.) If forecasts calling for 25% EPS growth for the S&P 500 Index hold up or, in our opinion, the “boom” drives those numbers even higher, equity markets will respond very positively.

Volatility

As we move through the summer, investors will attempt to make judgements about 2022. It seems likely that there will be a broader dispersion of economic forecasts as to how far into 2022 the current economic momentum will carry. This will likely lead to greater market volatility.

Inflation

The second question will surround how temporary the “boom” inflation will prove to be. Financial markets will not wait to see. Rising interest rates will likely result until inflation proves to be transitory – or not. The equity market response will depend on whether higher inflation accompanies a continued strong economic recovery.

Growth, Pricing, and Labor Costs

If the economic outlook for the second half of 2022 projects slower economic growth, then investors may return to faster growing companies. At the same time, if inflation also raises its ugly head, then investors will likely seek out companies with pricing power as well as those with lower labor costs – among others, growth companies also fit that outline.

Fixed Income

Having federalized fixed income markets, the Fed may still hold off attempting to moderate the yield curve’s upward tilt unless unexpected pressures result. With that and an uncertain inflation outlook, investors should stick with shorter-duration fixed income investments. This will avoid price risks longer duration debt normally faces from potentially rising interest rates.

Click here to download the PDF

 

Not Finding What You’re Looking For?

Princeton, NJ

300 Carnegie Center Drive, Suite 240
Princeton, NJ  08540
Phone: (609) 924-7250
Fax: (609) 514-4725

Point Pleasant Beach, NJ

501 Broadway
Point Pleasant Beach, NJ 08742
Phone: (732) 899-1000
Fax: (732) 899-3000

    THE POWER OF
    Information
    Expertise
    Collaboration

    KB Financial Companies is a close-knit team of diversified professionals dedicated to helping you reach your goals. Many of our senior personnel have over 25 years of experience. This extensive experience, combined with our integrated approach, increases our ability to add significant value to high net worth families, entrepreneurs and key stakeholders.

    © Copyright 2021. All Rights Reserved.

    KB Financial Partners LLC - Broker Dealer Disclosure

    Investment advisory services offered through KB Financial Partners, LLC which is independently owned and operated. Securities offered through M Holdings Securities, Inc., a registered broker/dealer, member FINRA and SIPC.

    For important information related to KB Financial Partners, LLC refer to the KB Financial Partners, LLC’s Client Relationship Summary (Form CRS) by navigating to  https://www.kbfinancialcompanies.com/disclosures/.

    For important information related to M Securities, refer to the M Securities’ Client Relationship Summary (Form CRS) by navigating to https://mfin.com/m-securities.

    Check the background of these firms and investment professionals on FINRA’s BrokerCheck

    Click here for important Disclosures

    Back To Top