Macro Overview - January 2021
COVID-19 reshaped markets, trade, retail, and consumer behavior globally in 2020 with lingering effects heading into 2021. Markets shrugged off pandemic concerns throughout the year, with all major equity indices reaching new highs in December. The anticipation of vaccinations along with the hope of a resurgence in consumer demand may eventually elevate economic activity to where it was before the emergence of COVID-19.
Passage of the $900 billion Coronavirus Relief Bill will place checks into the hands of millions of Americans as well as extend unemployment benefits and provide renewed funding for the Paycheck Protection Program (PPP). Other provisions included in the relief bill include deductions for business meals in 2021 & 2022 and a ban on surprise medical billing.
Vaccinations across the United States and internationally are expected to take months, as distribution efforts pose a challenge. The CDC estimates that at least 70% to 80% of the 330 million U.S. population needs to be vaccinated in order to achieve herd immunity. Guidelines issued by the CDC suggest that healthcare and essential workers should receive vaccinations first, then offered to the general public. The CDC is delegating the distribution of vaccines as well as the prioritization of inoculations to the individual states.
Optimism surrounding vaccinations is expected to propel consumer confidence higher, possibly leading to elevated spending levels. Employment and wages, which were hindered for most of 2020, are also critical factors in determining consumer expenditures.
The onset of inflation is becoming a reality for millions of Americans, as the cost of services and products has gradually been increasing since the pandemic began. Consumer inflation expectations rose in 2020 with the anticipation of lasting inflationary pressures heading into 2021.
The Federal Reserve communicated in December that it would continue to keep the federal funds rate near zero and buy $120 billion worth of bonds monthly until the employment situation improves. Rates held at historic lows in 2020 as ambitious efforts by the central bank facilitated liquidity and borrowing to maintain economic stability.
Behavioral consumer changes brought about by the pandemic shifted spending from restaurants, travel and movies to grocery stores and online shopping. Some economists expect the trend to stick even in a post pandemic environment.
Sources: Federal Reserve, CDC, Treasury, Tax Foundation
Rates Held Steady Throughout 2020 - Fixed Income Update
Rates remained near historic lows throughout 2020 as ambitious efforts by the Federal Reserve and the Treasury ensured critical liquidity in the fixed income markets.
Key rates fell across the board in 2020, as injected liquidity and active monetary and fiscal policy initiatives contributed to a low rate environment. Mortgage rates fell to new lows in 2020 a dozen times according to Freddie Mac weekly data, triggering a flurry of refinance activity throughout the year.
The U.S. Treasury yield curve steepened towards the end of 2020, an indication to economists that inflation is expected to become more profound. The yield on the 2-year Treasury fell to 0.13% as the yield on the 10-year Treasury rose to 0.93 % in December, pushing short-term yields lower and sending longer term yields higher. Economists and market analysis also view a steepening yield curve as a validation that economic expansion is becoming a more promising possibility.
Sources: Treasury, Freddie Mac, Federal Reserve
Markets Remained Resilient In 2020 - Equity Overview
Equity markets rebounded in a historical fashion from the lows in March 2020 to the end of the year, driven by vaccine optimism, low rates, and continued stimulus funding.
Margin loan balances increased during the pandemic, eclipsing $722 billion through November and surpassing the previous high of $668 billion in May 2018, as reported by the Financial Industry Regulatory Authority.
Despite headwinds from the pandemic, global equity markets were resilient for the most part, ending the year with favorable returns. Growth and momentum led with the technology and consumer discretionary sectors elevating the most.
The dramatic COVID-linked selloff in March and the subsequent recovery by August were of historical proportion, with unprecedented recaptures across nearly all sectors of the equity markets in 2020.
Sources: FINRA, Bloomberg
Coronavirus Relief Bill Overview
The Coronavirus Relief Bill extends and modifies several provisions first enacted by the CAREs Act in March 2020. The package extends relief through mid-March of 2021, providing support to individuals and small businesses in order to get through the remaining months of the pandemic. Following are highlights from the relief bill:
Stimulus Payment; A one time direct payment in the amount of $600 for individuals earning up to $75,000, heads of household earning up to $112,500, and couples earning up to $150,000. There is also an additional $600 per eligible child dependent.
Extension of Unemployment Insurance Compensation Benefits; Unemployment benefits will be extended for 11 weeks and expire on March 14, 2021.
Paycheck Protection Program (PPP); renewed funding for small businesses providing forgivable loans to first time and second time small business borrowers. Different from the initial PPP provisions, businesses can deduct expenses paid with forgiven PPP loans as well as a simplified forgiveness application for loans up to $150,000.
Business Meal Deductions; Small businesses can now deduct up to 100% of business meal expenses for 2021 & 2022.
Medical Expenses; A ban on surprise medical billings.
Eviction Moratorium; Extended through January 31, 2021.
Source: Tax Foundation
Consumers Expect Inflation To Rise - Inflationary Pressures
Even though traditional government data has current inflation at 1.2%, consumers have a different perspective with higher inflation expectations. The Federal Reserve Bank of New York tracks and maintains consumer inflation expectations every month, separate from traditional inflation data tracked by the Bureau of Labor Statistics.
The median one-year inflation expectation by consumers is 2.96% as of November 2020, nearly 2 1/2 times what the current inflation rate is. Unlike the traditional prices of goods and services translated into an inflation rate, as represented by the Consumer Price Index (CPI), actual consumer expectations are gathered and measured. Many economists view consumer expectations as a more accurate reading on inflation versus the CPI, since it tends to mimic consumer sentiment rather than a basket of stagnant goods and services.
Recent inflation expectations did rise during the pandemic, as consumers witnessed first hand price increases with groceries and essential items such as toilet paper and hand sanitizers.
Source: Bureau of Labor Statistics
Consumers Using Credit To Spend - Consumer Credit
Spending at stores essentially stalled in late March and April, as restrictions imposed to confront the spread of COVID-19 took it’s toll on the retail sector. The inability of consumers to spend freely also took a toll on the U.S. economy, since consumer expenditures make up over 70% of GDP. So when consumers were halted from spending, GDP fell an unprecedented amount of over 31% in the 2nd quarter.
The gradual reopening of stores in the 3rd quarter and increased online shopping options gave consumers the chance to regain their spending habits. Unfortunately, many of the same consumers that were spending freely before the pandemic had since lost their job or suffered a blow to their income. Millions of consumers have since resorted to tapping unused credit cards and lines of credit in order to meet ongoing living expenses.
Source: Federal Reserve Bank of St. Louis
**Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.