economy remains in the early stages of a new expansion, which should provide a tailwind for risk assets.
With a healthier consumer, supportive policy and GDP accelerating, the risk of overheating that could lead to inflation also has increased.
Even amidst the growing optimism, there are a few negative spots, including a series of economic releases that came in below expectations due to adverse February weather in the South and Midwest.
The second year can still provide above-average gains, but the market’s path forward tends to be much more labored, even in a stronger economy.
A key catalyst for the rally has been extraordinary fiscal policy, which jumpstarted the recovery more quickly and in greater size than in past recessions.
Policymakers appear intent on extending this historically generous support until the economy is clearly on firm footing, as evidenced by the $400 billion allocated directly to consumers via the economic impact payments of up to $1,400 per person – 2.5 times the $130 billion in EIP in the December stimulus bill.
Not all stimulus payments were, or will be, immediately spent: a large share of past payments were saved.
stimulus over the past year is equivalent to $43,000 per household, more than the estimated cost in current dollars of World War II.
As for labor recovery, over 75% of net job losses occurred in COVID-19-sensitive industries such as hospitality and retail.
With more than two million people still on furlough , more payroll reports approaching one million are not out of the question.
The strengthening economic backdrop, coupled with prospects of higher interest rates and inflation, could lead to greater volatility in equities.