A historically unprecedented amount of monetary stimulus has been injected into the U.S. economic system in the wake of the 2020 global pandemic. As troubling signs of significant increases in the prices of various goods have materialized, fears of a reemergence of 1970s-level inflation abound.
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.
U.S. economic growth is accelerating as rising vaccinations, increases in vaccine production, and easing social-distancing policies are beginning to inspire more business activity. Vaccine rollouts around the world are progressing at different speeds. Despite China having one of the world’s slowest vaccination rollouts, Chinese stocks have been among the most productive this year. The U.K. was the first country to begin vaccinations and remains the leader worldwide, with the U.S. a close #2. Vaccine distribution and herd immunity will go a long way toward releasing a considerable amount of pent-up consumer consumption demand.
Selling your RSUs and investing in a diversified equity portfolio is the difference between placing a large bet at the racetrack on a single horse (company) to win and placing smaller bets on the whole field (the economy) to complete the race. You may win big with the single bet, but you may also lose big. By contrast, if you bet the field, so long as the pack advances, which the U.S. economy has and will likely continue doing, you will come out ahead over time.
2020 will certainly go down in history as a year the world will never forget. The COVID-19 pandemic upended life as we knew it and briefly caused our global economy to grind to a halt. The humanitarian crisis continues to be devastating. After a record high on February 19th last year, U.S. stocks declined 35% by March 23rd making it the fastest, sharpest, and shortest bear market in history. Fortunately, the very aggressive monetary and fiscal response from Central Banks and governments around the world helped stock markets rebound and finish the year with healthy gains.
After a nervous October, stock markets enjoyed a very robust election week rally and then soared early this week when Pfizer and BioNTech announced impressive preliminary results on their COVID vaccine. Wall Street expects Joe Biden will become our 46th president while the Republicans maintain their control of the U.S. Senate. The resulting divided government should result in significantly fewer policy changes regarding taxes and business regulation than would have been the case had the Democrats swept last week’s election. The financial markets reacted to this outcome positively, as they usually enjoy the predictability of “gridlock” in Washington D.C.