The strong rebound in GDP could power the S&P to 4,500 by year-end.
President Biden’s massive $1.9 trillion fiscal stimulus package is the icing on the cake for the powerful recovery enjoyed by the U.S. economy over the past nine months. As a result, Federated Hermes’ macroeconomic policy committee has raised its full-year GDP estimate to 6.1% in 2021 from 5.3%. If achieved, that would be the strongest full-year growth since 1984, when the economy grew 7.2%. We still think the recession likely ended in May or June 2020, but the National Bureau of Economic Research will not officially date its conclusion until later this year.
Covid infections in the U.S. peaked on Jan. 8 and have since fallen sharply. At the same time, the rollout of three different approved vaccines (Pfizer, Moderna and Johnson & Johnson) has accelerated to 2.2 million doses per day, so we could reach herd immunity this summer. We believe we are setting up for a synchronized global economic recovery in the second half of 2021.
As in-person schooling resumes and states begin to lift social-distancing restrictions in places like bars, restaurants, retailers and stadiums, we should experience an “economic jailbreak” in coming months. People have been stuck at home for a year, with serious cabin fever and money burning a hole in their pockets. The personal savings rate is now at 20.5%, triple the 6.6% average over the past 20 years.
The labor market has recovered sharply over the past two months, with initial and continuing claims down 90% and 83%, respectively, from their elevated peaks last year. Despite brutal winter weather in February (which temporarily cost 600,000 jobs), nonfarm payrolls added a much stronger-than-expected 379,000 workers last month, led by a powerful rebound in leisure & hospitality, the sector that has borne the brunt of the labor market damage from this crisis.
We think we are grappling with a K-shaped labor market recovery. The unemployment rate for individuals 25 years of age and older with less than a high school diploma rose to 10.1% in February, compared with 6.2% for the overall economy (U-3). But the unemployment rate for those with a bachelor’s degree or higher declined to 3.8% as higher-skilled employees have been able to work from home. Consequently, those in the former group—who typically work in leisure & hospitality, retail, education, health care and the government—were the principal focus of Biden’s fiscal stimulus outreach. We’re hoping that will extend a short-term bridge to keep these workers afloat until the economy fully reopens and they are either rehired or retrained for a different job. Moreover, these lower-wage workers are more likely to spend most or all their stimulus checks and unemployment bonuses, which should further boost economic activity.
Business and consumer confidence have begun to perk up in recent months, consumer spending rebounded strongly in January, housing is at a 14-year high, manufacturing activity is strong across the board, and inventory restocking resumed in the fourth quarter after a year of liquidation. For the third consecutive quarter, corporate profits were much better than expected in last year’s fourth quarter, and with easy year-over-year comparisons, we expect these positive trends to continue in 2021.
While the powerful V-bottom rebound in economic growth over the past several quarters has sparked a sharp increase in nominal inflation, it has not yet begun to meaningfully filter its way into core inflation. As a result, Federal Reserve Chair Powell is steadfast that the fed funds rate will stay zero-bound through at least the end of 2021, and the Fed will continue its monthly purchases of $120 billion in Treasuries and mortgage-backed bonds.
We at Federated Hermes are decidedly not in the double-dip recession camp. Benchmark 10-year Treasury yields have moved sharply higher this year, from 90 basis points at the end of last year to 1.64% today, as the bond vigilantes are pricing in a strong economy. The S&P 500 has soared more than 80% from its historic trough last March 23 to this week’s record high, as forward-looking equity investors have reached a similar conclusion. So we’re sticking to our guns with our full-year target of 4,500, which implies 20% total return potential this year. We believe Biden’s generous fiscal stimulus program will provide a sugar high for a powerful economic recovery already solidly in place, and will serve as a cherry on top for another good year for stocks.
Raising our GDP estimates The fixed-income, equity and liquidity investment professionals who comprise Federated Hermes’s macroeconomic policy committee met virtually on Wednesday to discuss the powerful economic rebound that’s been underway since the middle of 2020 and the impact that Biden’s fiscal stimulus plan will have on both the economy and financial markets:
- Fourth-quarter 2020 GDP was revised up a tick to 4.1%, and the full-year 2020 number was unrevised at a decline of 3.5%. The final revision will come March 25.
- The Commerce Department will flash first quarter 2021 GDP on April 29. The new fiscal stimulus package is the icing on the cake for the powerful economic recovery of the past nine months, so we raised our growth estimate from 3.9% to 5.4%. The Blue Chip consensus raised its forecast from 2.3% to 2.9% (within a range of 1.1% to 4.5%), and the Atlanta Fed’s GDPNow forecast is now at 8.4%.
- Given accelerated vaccine distribution, we increased our second-quarter 2021 GDP growth estimate from 5.9% to 7.5%. The Blue Chip consensus raised its forecast from 4.4% to 6.3% (within a range of 3.3% to 10.4%).
- We think the U.S. will achieve herd immunity by midyear, which will accelerate the normalization of personal and business economic activity. So, we increased our third-quarter 2021 growth forecast from 4.7% to 8.1%, compared with the Blue Chip consensus, which increased its call from 4.8% to 6.2% (within a range of 3.0% to 9.2%).
- We also raised our fourth-quarter 2021 estimate from 4.7% to 5.5%, compared with the Blue Chip consensus, which raised its estimate from 4.2% to 4.7% (within a range of 2.7% to 6.5%).
- That raised our full-year 2021 forecast from 5.3% to 6.1%. The Blue Chip consensus estimate was raised from 4% to 4.9% (within a range of 3.6% to 6.2%).
- We also raised our full-year 2022 GDP growth estimate from 3% to 4.5%. The Blue Chip raised its forecast from 3.4% to 3.8% (within a range of 2.7% to 5%).