- American economic growth this year remains strong, despite the weaker than expected April employment report.
- Historically, high valuations usually portend future financial market volatility, especially in year #2 of cyclical bull markets.
- In Europe, the increased pace of vaccinations, combined with Europe’s central bank (ECB) rolling out their largest-ever economic stimulus package, should inspire growth in the second half of ’21 with corporate earnings growth potentially exceeding the U. S. for the first time in many years.
- The financial markets will need affirmation over the next year that today’s percolating inflation is transitory and the continuing rise in interest rates won’t compromise a longer-lasting economic expansion.
As expected, the overall pace of American economic growth this year remains strong, despite the weaker than expected April employment report. Our U.S. Gross Domestic Product (GDP) grew at an annualized 6.4% pace in 2021’s first quarter. The lion’s share of this growth was directly attributed to record amounts of pandemic-related fiscal aid our government has inserted into the economy. This stronger economic growth has been expected by the investment community and is optimistically reflected in today’s stock market valuations, which remain at historically high levels. As we have already experienced this year, high valuations usually portend future financial market volatility, especially in year #2 of cyclical bull markets.
After a surge in COVID cases over the winter months sent Europe back into lockdown, the European Union economy is finally improving. As in the U.S., the accelerating pace of vaccinations has enabled more countries to begin easing restrictions. The increased pace, combined with Europe’s central bank (ECB) rolling out their largest-ever economic stimulus package, should inspire growth in the second half of ‘21. The improved economic outlook for Europe and the U.K. is evidenced by Wall Street research suggesting corporate earnings growth could exceed the U. S. for the first time in many years. The ECB’s Chief Economist, Philip Lane, recently described Europe’s revised economic outlook as “at an Inflection Point”.
While COVID continues to wane in the developed world and hopefully does likewise in the emerging economies, confidence in the expected economic recovery will increase. Despite this improving outlook, financial markets will likely continue experiencing elevated levels of volatility. The market may have already realized the majority of 2021’s investment returns. As mentioned in our earlier comments, the financial markets will need affirmation over the next year that today’s percolating inflation is transitory and the continuing rise in interest rates won’t compromise a longer-lasting economic expansion.
Bond market interest rates have been flat since late March. However, we anticipate the global economic recovery accelerating through year-end and bond yields continuing their ascent higher. Central bank fiscal and monetary policies around the world remain committed to growth and inflation.
Our diversified investment portfolios are positioned to participate in this future growth with an “overweight” allocation to stocks and “underweight” investments in bonds. We are expecting more frequent, but shorter duration, stock market declines, and rebounds through year-end.
Please give us a call if you have any questions or concerns you would like to discuss. We are looking forward to reconnecting with you soon.