Market Outlook Update
As we look ahead into the second year of the pandemic, there is optimism that the worst may be behind us. This leads us to ask, what next? Some of the themes are continuing as expected, which bodes well for continued stock market strength across the globe. An expected increase in Emerging Market stocks cooled off in March and while valuations are still very attractive, the political risks have increased. We are making some smaller adjustments, anticipating passage of an infrastructure bill, which should continue to support U.S. stocks and the U.S. industrial sector in particular.
2021 should see strong global economic growth. The latest projections are for 6% GDP growth in the U.S., although this still leaves us below peak pre-pandemic GDP and employment. China’s growth will likely exceed projected U.S. growth and while Europe is currently afflicted with additional COVID restrictions, the European region is expected to have robust growth as well.
Interest rates have risen but are still very low. Fiscal stimulus through government spending and tax cuts is still very accommodative, particularly in the United States.
So, what does all this mean for investments? Latest consensus estimates for 2021 corporate earnings are robust with projected average earnings increases of 24% for U.S. companies, 35% for Eurozone and 36% for Emerging Markets (source: Charles Schwab, Factset data 3/10/2021). The opportunity is in stocks. After a long period of underperformance versus growth stocks (particularly technology), value stocks (financials, industrials) as well as small and mid-cap stocks will likely continue to outperform in the near term.
Overview: U.S. Fiscal Policy
The last stimulus package is working to increase economic activity. It was likely overly generous and a bit too broad, but it did get funds to many desperately in need. With increasing economic activity, earnings in lower income brackets should continue to be robust. Combined with aggressive vaccination, the economy will continue to improve. Infrastructure legislation is likely to be passed in some form, although it may not be as large as proposed by the Biden administration. Regardless of the final form, it will help with employment recovery and will likely lead to more opportunities for decent paying jobs, especially for those without college degrees.
Overview: U.S. Fiscal Policy—Taxes
As we have mentioned many times, prior to the pandemic, the Trump administration tax cuts led to our government spending 1/3 more than it was taking in. While pre-pandemic growth was accelerating, it was nowhere near the level necessary to pay for the tax cuts. Then the pandemic hit with declining tax revenues and increased spending. The Biden administration is embarking on another high-risk spending spree. Taxes are going to go up but how much and where is yet to be determined. Some proposed taxes such as those on corporations will have an effect on some, not all, publicly traded companies. Proposed individual tax increases will affect those earning over $400,000 but it is unclear exactly what will be passed. The Trump tax reform has a sunset provision so the tax cut will expire after 2025. The takeaway on this is to not get too concerned about everything you hear and read in the coming months. As legislation firms up, we will communicate how that affects you as well as respond to potential affects or changing investment opportunities.