Midyear Outlook 2021
PICKING UP SPEED
THE U.S. ECONOMY powered forward faster than nearly anyone had expected in the first half of 2021. As we were writing our Outlook for 2021 in late 2020, our economic views were significantly more optimistic than consensus forecasts—but in retrospect, not nearly optimistic enough. Our theme was getting back on the road again and powering forward. But as the economy accelerates to what may be its best year of growth in decades, power has been converted to speed and we’re trading highways for raceways.
THE U.S. ECONOMY has surprised nearly everyone to the upside as it speeds along thanks to vaccinations, reopening, and record stimulus. All have combined to produce what should be one of the best years for growth ever.
TAKING A BACK SEAT
DURING MUCH OF 2020 and early 2021, markets have been focused on fiscal policy due to massive government efforts to help the economy speed past the impact of COVID-19 restrictions. Policy still matters, but it will matter far less to markets over the rest of 2021, despite some important debates going on in Washington. Markets may anticipate an increase in government spending if Congress passes some version of the Biden administration’s Build Back Better initiative, but it will likely be spread out over almost a decade. The biggest risk may be around taxes, with businesses and wealthy households both facing the prospect of a higher tax burden to pay for the plan and help manage the deficit.
WE EXPECT THE strong economic recovery to continue to drive strong earnings growth and support further gains for stocks. However, after one of the strongest starts to a bull market in history—including a nearly 90% gain off the March 23, 2020 lows through June 28, 2021—stock prices reflect a lot of good news. As inflationary pressures build and interest rates potentially rise further, the pace of stock market gains may slow.
INTEREST RATES HAVE moved off their historically low levels to start the year, but we believe they can still go higher. Higher inflation expectations, the strong economic recovery, less involvement in the bond market from the Fed (more on this below), and a record amount of Treasury issuance this year are all reasons why we believe interest rates can move higher. Our target for the 10-year Treasury Yield at the end of 2021 is between 1.75% and 2.0%.
OPEN ROADS AHEAD
WE’VE BEEN SEEING it around us for months now. The U.S. economy is well on its way to fully reopening and much of the rest of the globe isn’t that far behind. We’re also experiencing the transition to normalcy, the burst of pent-up demand for everything that’s been on hold, including just ordinary, everyday life outside the pandemic. In its own way, that transition itself feels like it’s moving fast. And if you’re looking to go fast and want to navigate the challenges that come with speed, it’s always smart to bring a crew. To keep you fueled. To calm your nerves when you hit some traffic. To help plan your strategy and potentially change course. And to share your successes at the finish line.
This research material was prepared by LPL Financial LLC.
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