President Biden’s stimulus bill was signed into law last week and will provide an additional $1.9 trillion to the economy, which will bolster the recovery that was already unfolding.

Estimates show the U.S. consumer had about $2 trillion in excess savings before this latest package and the $410 billion in new stimulus checks will push this savings higher. We expect this excess savings to propel a strong recovery this year, especially given significant pent-up demand and an accelerating vaccine rollout. We were already confident on the recovery and this additional stimulus bolsters our conviction.

Cyclical industries that have been outperforming since last fall’s positive vaccine news should continue to benefit as the economy fully reopens. Travel and Leisure, Industrials, Materials, Energy, and Financials remain well positioned for the recovery.

Last Week’s Economic Releases Show Promise

The incoming economic data continues to improve as the vaccine rollout accelerates, infections decline, and states reopen their economies. Importantly, business and consumer confidence are improving while the labor market continues to heal.

CEO Economic Outlook Up Sharply

The Business Roundtable CEO Economic Outlook Index rose sharply in the first quarter and was up for the third consecutive time, to the highest level since the third quarter of 2018. This indicates growing optimism about the economy’s prospects. Capital spending plans, hiring plans, and expected sales all jumped. In a special question, 72% of CEOs (up from 67% last quarter) said that conditions for their companies have already recovered or are expected to do so by the end of this year. Importantly, the significant improvement in corporate profitability that is unfolding will allow flexibility with future spending and hiring plans.

Consumer Optimism is Also Rising

The Michigan Consumer Sentiment Index jumped to its highest level in a year. It was the first increase in three months, and by the second most since November 2016. Sentiment was propelled by more positive news on the vaccine rollout, prospects for a sooner-than-anticipated reopening of the economy, and more fiscal stimulus from the $1.9 trillion American Rescue Plan. Gains were led by those in the bottom third of the income distribution and those 55+ years old. Both current conditions and consumer expectations improved.

Labor Market Indicators Show Gradual Improvement

Last week’s labor market indicators all showed gradual progress that we expect to accelerate as the vaccine rollout accelerates. Initial claims for unemployment insurance fell 42,000 last week to 712,000, the lowest level in four months. In addition, continuing claims and the insured jobless rate both dropped. On a four-week average basis, all three indicators declined, reflecting a gradual trend in improvement in labor market conditions.

The improvement in the labor market is being confirmed by other labor market indicators. The JOLTS report showed the number of job openings increased to 6.9 million, while the number of unemployed per job opening dipped to 1.5, a massive improvement from the peak of 5.0 in April 2020. The Employment Trends Index (ETI) increased in February, and is up in nine of the past 10 months, further confirming that labor market conditions continued to improve from the pandemic slump.

Inflation Still Muted

Last week’s consumer price report showed core inflation remains muted and below the Federal Reserve’s inflation target of 2.0%. Core inflation has surprised to the downside in three of the past five months. While we are seeing some temporary inflation due to COVID-related supply chain disruptions, we don’t anticipate inflation becoming a problem at least until the significant labor market slack created by the crisis is absorbed. Consequently, we view the current move higher in Treasury yields as a sign of economic normalization, rather than an inflation signal.

All of these indicators continue to support our favorable outlook for the economy and stocks where we anticipate better-than-expected economic readings and corporate profits in the coming quarters.


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