Stocks rebounded this week, hitting new highs, with the S&P 500 breaching the 4,000 mark for the first time. This new figure could be the beginning of a breakout higher, though technical levels tend to be a smaller contributor to direction than fundamentals in our view. Investors cheered the announcement of a new infrastructure package that will begin working its way through the legislative process, potentially adding another $2 trillion in spending, likely boosting economic growth in the coming years. Meanwhile, economic data is powering higher, with the ISM manufacturing index reaching the highest level since 1983, and hiring expected to grow the most in years. Detracting from the optimism are rising COVID cases in the US and abroad, with worrying signs that another wave could be in store, as more virulent variants drive the spread. Fortunately, the vaccine rollout campaign is proving very successful in the US, and should hopefully blunt the worst of COVID’s effects on hospitalizations and deaths. All eyes will remain on the containment of the disease, with the reopening contingent on consumers’ ability to re-engage with the world.
Our belief that the economy will show strength unseen in decades has been reinforced by recent data, and developments from the Federal Reserve and out of Washington only further adds to that view. The recent fiscal package, supportive monetary policy, the uptick in vaccine supply, and record levels of consumer savings waiting to be unleashed on the economy should provide a backdrop to keep risk appetite elevated for many quarters to come. More stimulus in the pipeline would only add further to near-term growth, though the cost of higher taxes could serve as a headwind to corporate profits and potentially consumer spending in years ahead. Worries over inflation we believe are overdone, with the larger themes such as an aging population, innovation, and stagnant longer-term growth trends weighing on inflationary pressures. The growth rebound is surely to show up in a short-term spike in cost increases, as supply lines remain disrupted from last year’s shutdown, but competition and global manufacturing capabilities will quickly adjust to keep a lid on sustainably higher prices. It is the Fed’s goal, meanwhile, to attempt to push inflation above their 2% target to make up for years of muted price growth, indicating short term rates will stay low for a very long time to come.
We are marginally trimming some exposures to large-cap tech stocks and longer-duration bonds, as we feel the cyclical trade has more room to run in the near term. We are already positioned for a significant pickup in economic activity, remaining overweight equities across portfolios, with a particular focus on those sectors and geographies we believe will most benefit from the reopening. We continue to expect interest rates to move higher, though at a slower pace that can be more easily absorbed by markets. Ultimately, these higher yields we believe represent a healthy return to stronger growth, and is not indicative of runaway inflation ahead. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.