Market Update
- The restart is about turning things back on, not about the rebuilding of consumer confidence that is needed in a typical recovery.
- We may see some near-term inflation as demand recovers and supply lags
- The restart may be faster than expected due to $1.9 trillion stimulus package, pent-up demand, and vaccination trends
- We are bullish on US economic growth in 2021
Restart vs. Recovery
It is likely that the market has not yet realized the speed and size of the pending recovery. As the world emerges from the pandemic, it will take the form of a rebound from a temporary shock to the system rather than an economic downturn in the traditional sense.
The dynamics are different; there aren’t systematic deficiencies to resolve this time. Pent-up demand will be satisfied amidst the $1.9 trillion stimulus package, the vaccine, and a return to pre-COVID growth trends. Remember that it was the shutdown, not a lack of income, that halted spending.
Inflationary dynamics may play a part
During a recessionary period, demand falls. However, in the COVID shock, both supply and demand fell in lockstep as the country shut down. The question will be whether or not supply is able to rise in tandem with the burgeoning demand that will be unleashed as the economy bounces back, keeping pricing pressures in check. It is likely we’ll see some inflationary pressures in the medium term.
The bottom line
All of this bodes well for a risk-on stance favoring cyclical equities, small caps, emerging markets, and real assets as an inflation hedge over the next six to 12 months. It would be conceivable to see US GDP returning to the levels it was before the pandemic, but this would not be expected until mid 2021 at the earliest.
Sources
BlackRock. (2021, March 15). Weekly Commentary. Retrieved from https://www.blackrock.com/corporate/literature/market-commentary/weekly-investment-commentary-en-us-20210315-strong-start-not-recovery.pdf