While stocks fell last week with the S&P 500 Index down 2.4%, we remain confident in the outlook for the economy and stocks.

The incoming economic data continues to show a recovering economy, virus cases and deaths continue to plummet, and the vaccine rollout continues to improve—bolstered this weekend by FDA approval of Johnson & Johnson’s single-shot vaccine.

A Healthy Consumer Will Fuel the Reopening

We are seeing a positive impact on the consumer from the $900 billion stimulus plan that was approved late last year. Friday’s income and spending report showed personal income shot up 10.0% in January, as stimulus checks and extended unemployment benefits from the year-end COVID relief bill flowed into households. It was the second-largest increase on record, behind only the surge in income after the $2.2 trillion CARES Act was implemented early in the pandemic. The income subsidy led to a 2.4% rebound in personal consumption expenditures, up for the first time in three months.

Consumers saved a larger portion of their income in January, with the personal saving rate spiking to 20.5% from 13.4% at the end of last year. While this is lower than the savings rate early in the pandemic, it is higher than at any other time in history. With the vaccine rollout gaining pace and the economy reopening more fully as the year progresses, services spending (especially for travel and leisure) should ramp up as well, helped by the fiscal stimulus so far and more in the pipeline.

Meanwhile, the House of Representatives late Friday night approved President Biden’s $1.9 trillion additional stimulus with the President urging the Senate to take quick action on the measure. Democrats want to finish a final package by March 14, when certain types of federal unemployment assistance are set to expire. Consumers are already sitting on more than $2 trillion in excess savings and this will further bolster them for the full economic reopening as the pandemic fades.

Leading Indicators Remain Encouraging

The Conference Board’s Leading Economic Index (LEI) increased in January for the ninth consecutive month. Seven of its 10 components made positive contributions, led by building permits. The six-month rate of change of the LEI posted 5.1%, which is off its peak of the fourth quarter, but still near the fastest pace since May 2004. The strength was widespread across LEI components, with the indicators suggesting a continued economic recovery in the near term, with growth at an above-trend pace.

February Manufacturing Indicators Support Positive Outlook

At the beginning of every month, we receive timely manufacturing business surveys from the ISM and Markit. These surveys continue to show healthy growth which suggests that the U.S. manufacturing sector is close to fully recovering the output lost to the pandemic last year, and a renewed surge in respondent optimism suggests the recovery has much further to run.

Particularly encouraging is a marked improvement in demand for machinery and equipment, hinting strongly at strengthening business investment spending. In addition, new orders for consumer goods showed the strongest back-to-back monthly gains since the pandemic began, suggesting higher household spending is also feeding through to higher production.

Positive News on the Vaccine Rollout

Johnson & Johnson’s vaccine received FDA approval over the weekend and began rolling out on Monday. The initial shipment has nearly 4 million doses and they expect to ship 20 million by the end of March. They expect to deliver a total of 100 million does for use in the U.S. by the end of June. This vaccine is a single shot that can be stored at normal refrigeration temperatures and we view it as a potential game changer in the fight against the pandemic and vaccine shortages.

In sum, we view rising long-term bond yields as a sign the economy is normalizing and remain optimistic on the outlook for the economy and stocks.

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