Now that we are midway through 2021, it’s helpful to look at how the first half of the year performed. We entered 2021 amidst uncertainty: awaiting vaccine rollout and wondering how the U.S. economy would react. Luckily, the vaccine rollout happened much earlier than anticipated, consumer spending rose, and the economy benefited. Given the performance of the past 6 months, what might we be able to expect for the rest of the year?
Vaccine Rollout and Economic Performance
In the beginning of 2021, the prediction for GDP growth in the U.S. was at 3.5%. However, that growth has been significantly stronger than expected; as of April 2021, growth was at 6.4%, according to the International Monetary Fund.
Although the vaccine rollout helped boost the economy and the U.S. policies on lockdowns have relaxed, there is still some concern regarding new Covid variants and the fact that the amount of people receiving the vaccine has slowed. Because of this – while we don’t anticipate a full nationwide shutdown again – we are cautiously optimistic that growth will continue, barring any unforeseen circumstances.
For the past 10 years, inflation has remained steady at around 2-2.5%. However, over the past few months, core inflation has been steadily increasing from 4.2% in April to 5.1% in June (compared year-over-year). However, the Fed has said that they are not going to raise interest rates right now, so stock and bond markets have not negatively reacted to inflation data so far.
However, some industries will be affected, so a proactive approach against rising prices is to talk to your financial advisor about reviewing and diversifying your portfolio. You may also want to consider:
- High-quality stocks/equities of companies that may better adjust to inflation over time
- Treasury Inflation-Protected Securities (TIPS)
- Real estate
- Precious metals
Economic Recovery and Booming Industries
We are seeing certain industries start to recover. Domestically, air travel is up, and consumers have begun to resume dining outside of their homes. However, the numbers are still a little skewed in terms of job and income performance because of prior stimulus payments and unemployment benefits. We anticipate that there will be further fiscal stimulus from Congress, and yet we don’t know how Covid variants might affect a full return to work for many in the U.S. We also anticipate that the digital trends we saw in 2020 are here to stay. The moves to telehealth, streaming services, e-commerce, and digital payments are becoming permanent fixtures for many, whether out of convenience or necessity. Traditional retailers have also made moves to digital platforms and have benefited from the change. Electric vehicles and renewable energy are expected to get a boost from a $3.5 Trillion bill that Congress will introduce relatively soon.
Bonds and Rising Interest Rates
Currently the federal balance sheet holds close to $9T in bonds. We believe that we will see the Fed reduce their bond holdings in the future referred to as bond tapering, and then raise interest rates. The expected timeline for the first rate hike is still projected to be sometime in 2023; even then, the rates aren’t expected to be hiked aggressively.
Does this mean you should diversify your bond portfolio right now? Yes. The 10-year Treasury was at a .5% yield, rose to 1.7%, and has since settled around 1.34% as of 8/11/21 due to Covid variant concerns. While Treasury bonds are a good measure against the volatility of the stock market, they may not be such a good long-term investment. Depending on your risk tolerance, there are other bond options that may be more beneficial to you, such as municipal bonds, inflation adjusting bonds, short duration bonds, and high yield/junk bonds.
Covid Outlook on Economy
A few weeks ago, the outlook on Covid was much more optimistic than it is right now. Due to the Delta variant, Covid cases are again rising, though there are fewer deaths. However, due to the high transmission rate of the Delta variant the original projection of herd immunity at 70% has been moved to 80-90%. Globally, there are not enough vaccines available which can affect the global economy; countries like the U.S. and the UK have higher vaccination rates while others are lagging. This may help in reopening domestic economies for developed nations, but in order for the economy to get back to fully normal developing nations would need to have higher vaccination rates since this is where much of manufacturing is done and where raw materials are produced.
2021 Economic Mid-Year Outlook and Beyond
Remember that it’s important to keep the lines of communication open between you and your financial planning team. Making proactive financial decisions based on the long-term, instead of reacting to short-term news, is the best option for your overall wealth and security. If you want to explore options or have any questions regarding the economic outlook of 2021, please contact us today.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.