What's Happening While We Are Trading?
Mar 05, 2021
“Hit me with your best shot”…for those of you who know the song, this is it !!!!!
Once everyone in the country is vaccinated against COVID-19, life will start to regain a sense of normalcy.
When will we go back to what was normal? I am not sure but I believe we are on the right path. In the meantime, let us take a look at where things are after two months into 2021.
In addition to the record unemployment numbers caused by the pandemic, there is a large number of Americans who are still working but haven’t been spending money like they did before the health crisis. They have been banned from gatherings and have been very frugal with their spending. They have been reluctant to travel and they have accumulated substantial savings.
I believe that consumers are dying to go to restaurants, travel, attend sporting events, shop and want to feel like they are living again. I am very optimistic that we are all going to be ok very soon, and in the meantime, there are signs that point to the positive.
Indications of resilience in global industry, a surge in American retail spending, along with fiscal stimulus around the world, especially from the current US administration, point to higher growth in the U.S .According to JPMorgan Chase & Co. economists, the recovery at home is accelerating, putting it on course to outperform China’s V-shaped rebound. “We now expect the U.S. to outpace China, moving on a path that raises GDP well above its pre-crisis trajectory,” the economists wrote in a note. “We expect a regional gap between the U.S. and China and the performance of the rest of EM to remain large for some time to come.”
The alignment of U.S. fiscal stimulus and rebound from COVID-19 in Europe will help bring a 7.6% surge in world GDP around mid-year, they said. While the U.S. picture looks particularly promising.
All peachy news,(which makes me say hmm?), too good? Time will tell. In the meantime let's take a look at what else is happening.
GDP has been closing in on its pre-pandemic high. Output has climbed to 98.7% of its February 2020 peak. Consumers accumulated an estimated $1.5 trillion in excess savings (I am purely reporting a published number here). Savings rate (S) is calculated by the difference between income (I) and consumption (C), divided by income: S = (I - C) / I over the past year). As the pandemic wanes, a wave of backlog demand could be unleashed as signs of a recovery emerge ($).
Interest rates and inflation are low, despite very large deficit-financed relief packages and what else is to come.
On the opposite side of the spectrum, employment recovery has ways to go. There are about 10 million people looking for jobs (this may be a slow recovery because this is when companies re-engineer the workforce using the economy as an excuse).
All businesses are looking to create efficiencies, paying extra attention to their current liquidity, borrowing capacity and making sure their teams are engaged in the right areas (service and tech?) to create growth opportunities.
Investors and most people are optimistic that COVID-19 disruptions will soon fade, allowing globalization and digitization to continue lifting economies and profits in 2021.
Return to normal? I will repeat … GDP is gaining on its pre-pandemic levels as COVID-19 vaccines continue to roll out.
- After growing at a 5%-7% annualized pace in the fourth quarter, economic output has almost recovered its pandemic losses.
- However, due to missed growth, the economy may be operating at only 98.5% of its true potential, leaving plenty of room for above-trend gains in 2021.
- Though vaccinations are off to a slow start, many experts believe the pandemic in the U.S. will be under control at some point in the summer.
- As life returns to normal, forecasters call for real economic output to expand at 4.5% to 5% or greater in 2021, bringing a steady improvement in employment.
- The household saving rate almost doubled last year to 12.9%. This could translate into a potential $1.5 trillion supporting pent-up consumer demand as the pandemic subsides.
- The 2021 rebound may be buoyed by stabilizing energy prices and resumed production of Boeing’s 737 MAX 8 aircraft among other manufacturing advances.
Fiscal relief in the first quarter: The pandemic’s disruptions are likely to persist through the first quarter. Fortunately, Congress has passed a $1.9 trillion relief bill (not approved yet) aimed at rescuing struggling households and businesses.
- The relief package (depending on which one is approved) may amount to about 8.86% of nominal GDP (if max is approved). Many believe this latest stimulus could boost real GDP in 2021 as long as it doesn't leak outside the US (as long as products and services are purchased from US based companies and not from foreign entities).
- It provides a $300 weekly supplement for unemployment insurance, as well as $1400 direct payments to many individuals in addition to infrastructure spending.
- While the legislation does not include funding for state and local government, the shortfall in tax receipts has not been as severe as anticipated. Based on latest data tax revenues had improved 3% over the 12 months ending September 2020.
- The Fed is continuing to provide monetary support. The target for short-term interest rates remains pegged at zero, and long-term interest rates are resting 2 percentage points below their theoretical equilibrium.
The job market lag: COVID-19 shutdowns negatively impacted workers in labor-intensive industries like dining and hospitality. While GDP has come back, employment should recover throughout the year.
- The headline unemployment rate has fallen to 6.7%. However, it doesn’t count the 4 million workers who left the job market (the official unemployment rate, called U-3, is something to eye warily. Based on regular household surveys, it assumes that to be unemployed means that a person has actively searched for work during the previous four weeks. Active means applying for work or searching at an unemployment office, not looking through job listings that suggest there is nothing for which the person qualified) in 2020 or independent contractors still working but not earning what they were before the pandemic and people who have been unemployed for a long time and are not represented in the statistics.
- Recent history suggests that workers will likely return to the labor force as conditions improve.
- Broader measures of joblessness suggest that the economy is approximately 10 million jobs short of full employment.
- The Federal Reserve anticipates steady job creation throughout 2021, with the median forecast calling for unemployment to fall to 5% by year’s end.
- The job recovery estimate may be conservative. It would not be surprising if the fourth quarter saw unemployment returning to the 3.5%-4.5% range of recent years.
Inflation worries may be premature: Despite a $3.3 trillion federal deficit, inflationary pressure is unlikely to appear anytime soon.
- COVID-19 relief bills are more akin to a rescue package than traditional stimulus—the legislation largely replaces lost income, rather than creating new demand.
- The targeted nature of the spending makes it unlikely to fuel inflation. As unemployed workers find jobs and business revenues climb, Feds help should taper off.
- Bond markets were largely unaffected by this spring’s deficit-financed CARES Act, as most of the newly issued debt was absorbed by the Fed’s asset purchasing program.
- Eventually, the Fed will need to unwind its excess holdings. But as quantitative easing demonstrated, the Fed’s growing balance sheet will not necessarily create inflationary pressure.
- With central banks abroad also providing extraordinary monetary support, the U.S. dollar should hold its value against major global currencies.
- The U.S. still faces long-term fiscal challenges but they are largely driven by demographics. 2020’s deficit spending has done little to worsen the nation’s long-term outlook.
Equities are looking ahead: Investors are confident that COVID’s disruptions will prove transitory.
- Equities markets have long assumed the health crisis would be short-lived.
- Pandemic shutdowns have hardly threatened the long-term forces of globalization and digitization, which are transforming the economy and lifting corporate profits.
- If anything, the pandemic has demonstrated the adaptability of the U.S. economy and accelerated adoption of labor-enhancing technologies (Hmmm? Improved productivity? Lower headcount??Unemployment?).
- Investors are also optimistic about the economy’s true potential. The pre-pandemic business cycle saw the coexistence of low unemployment and tame inflation, which implies that the maximum level of sustainable output may be higher than commonly assumed.
- The pandemic has done little to diminish the opportunities presented by Asia’s emerging economies. The rise of China and India promises to create the world’s largest consumer markets, and American corporations are eager to expand abroad.
All we can do is observe, be aware of changes and focus even more on trading because all of this movement will develop opportunities within the markets and more $$$$$ in our pockets.
It can be difficult sometimes to deal with the ups and downs of life. We might see the mountain too high to climb and feel like quitting is the best possible option. In reality, every sunrise is a new opportunity. Believe (and have a plan) that tomorrow will bring the success that today failed to bring. Be positive and live with love, as it is the best way to live our lives.
Trade confidently and safely.
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