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Economic Recovery Is Underway

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With the completion of the fourth quarter of 2020 corporate earnings releases, investors are monitoring daily COVID headlines, rising interest rates, and the potential for a new stimulus program. Corporate earnings were mostly better than expected and guidance for the year ahead was surprisingly strong.

There is a slow rotation from growth and technology stocks to more deep value and cyclical stocks. A cyclical recovery is under way, but supply chain disruptions and inventory shortages are causing price surges in commodities and many finished products. For example, a global microchip shortage has caused a slowdown in the manufacture of such different products as computers, washing machines and cars. With demand increasing and production lagging, the listed prices for these goods are likely to rise.

The Federal Reserve has pledged to continue buying bonds and building its balance sheet to support full employment as its mandate, while investors begin to question the control of inflation. The 10-year U.S. Treasury Rate has climbed from a low yield of 0.56% in 2020 to a rate of 1.45%. This can be seen more positively as a vote of confidence that the economy is re-gaining its health and growing again. Fed Chairman Jerome Powell said in his testimony this week that vaccines are “the single best policy” for the economy, stressing that it was more important than fiscal or monetary policy to insure a normal-growing economy. Employment growth is accelerating and will also begin to resolve the income inequality disparity that has become such a prevalent discussion point during the pandemic.

With equity market volatility, the financial media are debating market valuations and highlighting the “bubble” stocks. While market valuations are not unreasonable, there are certain sectors that exude speculative activity. The new risk-taking culture is visible in excitable day-traders supporting the obsolete retailer known as Gamestop, entrepreneurs who promote bitcoin, and the social network penny-stock “pump-and-dump” traders. In the equity market, the sectors that performed the best so far this year are energy, financials and healthcare, which at the beginning of the year were the most undervalued groups. Small caps are also outperforming, which indicates a confirmation that an economic recovery is under way. We expect industrial, consumer discretionary and information technology sectors will continue to do well this year.

The proposed $1.9 trillion relief package, riddled with campaigns promises from prominent politicians, is flack with bipartisan criticism. While many believe the contents constitute an undisciplined financial giveaway, the Biden Administration rushes to pass the legislation. With 10 million Americans still unemployed, the improving economy and a receding virus will prompt re-hiring without the need for more fiscal spending. The economy grew at 4.1% in the fourth quarter of 2020, so more stimulus will fuel an exponential jump in 2021 GDP. This will serve to push equity market valuations higher, so we remain constructive in our equity market outlook.

Index Year-to Date Return

  • S&P 500 Index 1.5%
  • Nasdaq Index 2.4%
  • Russell 2000 Index 11.4%
  • MSCI EAFE Index 1.0%

Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any federal government agency, and are subject to investment risks, including possible loss of principal.

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