What's a Few Trillion Dollars Among Friends

March kicked off with anticipation of a new stimulus package and as the distribution of the Covid-19 vaccines continued to accelerate, President Biden signed the American Rescue Plan Act into law on March 11, providing $1.9 trillion in new spending. That was followed on March 31 by a proposed $2.25 trillion in infrastructure spending. Another month, another few trillion dollars.

Stocks were inclined to view all this spending favorably. The rotation out of technology and into cyclicals continued in week one, as the S&P 500 rose 0.8% while the Nasdaq fell -2.1%. Financials, energy, and industrials were strong. Yields on the 10-year treasury moved higher, hitting 1.55% on the week. Oil prices rose. The February jobs report showed a pickup in hiring, with the economy adding 379,000 jobs, well ahead of estimates of around 210,000. The unemployment rate fell to 6.2%. (Source: WSJ.com, 3/5/21)

It turned out that while tech was down, it wasn’t quite out, as shares rallied mid-month. The Nasdaq moved up and the S&P 500 hit a new high. This was encouraged, perhaps, by relatively benign inflation data and by the Fed’s vocal commitment to keeping short-term interest rates low. Data from the Bureau of Labor statistics showed a 0.4% rise in the February Consumer Price Index (CPI), led by a 6.4% jump in the price of gasoline. On a trailing 12-month basis, the CPI was up 1.7% before seasonal adjustment, below the Fed’s long-standing 2% target.

Still, the bond market was not fully convinced that the flood of money would remain benign, and rates rose through much of the month, with the yield on the 10-year reaching 1.75% on March 18 for the first time since January 2020. (Source: Bloomberg.com, Treasury Yields Top 1.75% After Powell Spurs Bets on Inflation, 3-18-21) Optimists were inclined to attribute this more to a strengthening economy than to concerns over future inflation, and there were plenty of signs that growth is picking up. U.S. manufacturing indexes hit a 37-year high, according to the Institute for Supply Management (ISI), jumping to 64.7 in March from 60.8 in February. Home prices surged to a new record in January, up 11.2% on an annualized basis, according to the CoreLogic Case-Shiller Index, and 4Q 2020 GDP growth was revised upward, to 4.3% from 4.1%. Weekly jobless claims bounced around, but generally trended lower.

A point on inflation.  There is much debate about whether the magnitude of fiscal spending and the re-acceleration of growth will lead to higher price levels going forward. With this as background, readers should be aware that reported inflation is likely to be much higher over the next 3-4 months, based on year-over-year comparisons.  This is because the level of the Consumer Price Index (CPI) dropped in the second quarter of 2020 as the pandemic related lockdowns began to take hold and reduced economic activity. 

As a result, we believe 2Q reported inflation rates may be well above the Fed’s stated goal of 2%, possibly as high as 3-4%, though we believe that is likely to be transitory. Inflation remaining at or above the 3-4% range in the near term or throughout the summer would more likely be an indication of actual acceleration.  

Of course, what month would be complete these days without some kind of outlier event? In February, it was GameStop and the rise of the “meme stocks”; for March, it took the form of a reminder that the shipping industry is still central to the movement of goods worldwide. By one estimate, about 80% of global trade by volume, and 70% by value, moves about the planet on ships. (Source: UNCTAD.org - Review of Maritime Transport 2018) About 12% of that passes through the Suez Canal. Few, if any, of the transiting vessels are bigger than the Ever Given which spent part of March wedged sideways in the canal. Lloyd’s List, a maritime publication, estimated that the ship was holding up $9.6 billion worth of trade a day, or about $400 million an hour. (Source: BBC.com, The cost of the Suez Canal blockage, 3/29/21) The ship was finally freed before the month drew to a close but not before it gave the world a vivid reminder of just how interconnected our global economy has become (and not before launching a fair number of memes of its own).

The month, and the quarter, ended on an upbeat note with the S&P climbing 1.1%, the Dow 0.2% and the Nasdaq 2.6%. (Source: Associated Press, How major US stock indexes fared Thursday, 4/1/21) All are strongly positive for the year. And in a spoiler alert for readers: released on Friday April 2nd, the April jobs number was big, with the economy adding 916,000 jobs. The unemployment rate fell to 6.0%. Something we’ll be watching closely and no doubt discussing in our next monthly update. 

Related: The Bond Market Has Its Say