Falling coronavirus cases and hospitalizations and the prospect of another $1.9 trillion in fiscal stimulus led Morgan Stanley equity strategist Michael Wilson to declare that “the recession is effectively over” in a research note this weekend, but risks still remain.
KEY FACTS
Between the United States’ progress in combating the public health crisis, President Biden’s American Rescue Plan nearing final passage and a “spectacular” fourth quarter earnings season, “it’s hard not to imagine an economy that’s on fire this year,” Wilson wrote.
The reopening of the economy and sharp uptick in consumer spending fostered by pent-up demand and excess savings is leading analysts from Goldman Sachs to predict a major hiring boom, with the unemployment rate falling as low as 4.1% by the end of the year.
The analysts added that the generous federal unemployment benefits (the most recent stimulus bill authorized a subsidy of $300 per week) have the potential to depress the recovery in the labor market, but described the estimated effects as “small.”
Wilson notes that equity markets, especially the tech-heavy Nasdaq, have struggled in recent weeks despite the positive news.
He cautions that the correction that began in January has “further to go before it’s over,” especially since investors are now keeping an eye on rising Treasury yields, inflation risk and the possibility that the Federal Reserve might tighten its policy.
Wilson attributes some of the stagnation in the market to rising yields that are finally beginning to weigh on sky-high valuations as well as the move by investors from growth stocks to value and cyclical stocks.
BIG NUMBER
6.9%. That’s Goldman Sachs’ estimate for U.S. GDP growth in 2021, up from a 3.5% decline in 2020.
CRUCIAL QUOTE
“The economy is off and running,” Moody’s Analytics chief economist wrote in a Monday research note. “Growth will be rip-roaring during the coming year, with real GDP expected to rise nearly 7% and payrolls by well over 6 million jobs.” Zandi says the “winding down COVID-19 pandemic” will fuel those gains and expects a full economic recovery—with unemployment below 4%—by early 2023, though that recovery could come faster if the pace of vaccinations across the globe picks up or slower if vaccines turn out to be less effective than expected.
KEY BACKGROUND
Some experts have pointed to rising Treasury yields, which have rebounded significantly since hitting rock-bottom lows at the beginning of the pandemic, as evidence that dangerous inflation could be around the corner, especially given the trillions of dollars in stimulus spending the federal government has already authorized. "There's good reasons for yields to go up: economic activity. And there's bad reasons: inflation," Mohamed El-Erian, Allianz’s chief economic advisor, told CNBC last month. "Economists, even those who have long supported a big fiscal push, are saying be careful. Going big may be too big."
This article originally appeared on Forbes.
