Some improving Covid-19 health numbers and the continued expectation of a substantial Congressional spending bill propelled stocks higher this week. Small-cap, mid-cap, and emerging markets stocks all continued their torrid pace. Additionally, the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 Index all touched record highs. Inflation remained muted, reducing concerns that rising prices will be a significant headwind in 2021.
For the week, the S&P 500 Index finished up 1.2% while the Dow Jones Industrial Average advanced 1.0%. Year to date, the S&P is up 4.8% while the Dow has gained 2.8%. First-time unemployment claims declined to 793,000, while continuing claims totaled 4.5 million, both in line with expectations. The next round of coronavirus spending continued to slowly work through Congress this week, with increasing likelihood that most of President Biden’s proposals will be enacted through the reconciliation process in the Senate after passing the House. While timing of any final action on a virus spending bill in the Senate has been pushed back by the second impeachment trial of former President Trump, markets seem to be pricing in completion of another bill sometime during the first quarter. Although final details remain to be worked out, there is no doubt that passage will increase federal debt. The FY2021 federal deficit is already projected to be $2.3 trillion, even before considering the new bill’s additional spending.
Although the near-inevitable new round of spending adds to concerns about rising inflation, it has not yet materialized in the data. In our view, the risk of rising inflation causing problems for asset prices is much more likely in 2022 and beyond than this year. We believe that as long as unemployment remains elevated, inflation will have a hard time breaking significantly above the Federal Reserve’s 2% target for a sustained period. There may be a short-term blip upwards in this year’s second quarter inflation number (as it will be compared to the economic cratering of second quarter 2020), but the Fed’s willingness to evaluate inflation over a longer period before considering raising short-term interest rates continues to bode well for stocks.
Vaccinations have slowly but surely begun to take hold in some countries – especially in the United States, the United Kingdom, and Israel. Coronavirus cases in the U.S. have fallen significantly from January’s elevated levels, and U.S. COVID-related hospitalizations have fallen to their lowest number in three months. It is estimated that more than 40% of the U.S. population currently carry COVID-19 antibodies. There remain logistical hurdles with the vaccine, and many nations still face significant challenges with access and distribution, but our prognosis is still for second half 2021 economic growth to accelerate worldwide as immunity grows across the globe.
As we continue to navigate through the pandemic, our commitment remains to be here for you each step of the way. As always, please contact us with any questions about the economy and your financial plan.