A year after the pandemic low, the economy is set to surge.
March 23 marked the one-year anniversary of the market low brought on by the pandemic. Since then, the S&P 500 has seen its largest 12-month gain since 1936, exceeding the recovery in 2010 from the global financial crisis. Equity markets performed well through the first quarter, extending the gains made since March last year. The S&P/TSX rose 7.3%, while the S&P 500, Nasdaq and MSCI EAFE respectively gained 5.8%, 2.8% and 2.8% in U.S. dollar terms. Perhaps the biggest surprise to the market was the increase in bond yields. The U.S.10-Year Treasury Yield started the year at 0.91% and very quickly rose by 83 basis points to end the quarter at 1.74%. The 10-Year Government of Canada bond yield gained 88 basis points to finish the quarter at 1.56%.
An optimistic outlook
The story for the first quarter has been one of optimism surrounding the reopening of the global economy. Vaccinations are rolling out, with more than 693 million doses administered across 165 countries. In the U.S., which has suffered the highest death toll from the virus, more than 168 million doses have been given, and almost 18% of the population is fully vaccinated. Further boosting hope in the States is another round of stimulus, with cheques on their way to over 100 million people.
We’re forecasting sustained higher inflation through 2021 with only some moderation in early 2022. Evidence of higher inflation is already making its way through the economic data as prices surge for raw materials. Lumber, one of the biggest costs in home building after land and labour, has never been more expensive and is more than twice the typical price for this time of year. Crude oil, a starting point for paint, drain pipe, roof shingles, and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout homes, costs about a third more than it did in the fall. Given the low levels of business inventories combined with the backlog of orders and unusually strong demand, the direction for inflation is most likely higher, not lower.
We expect economic momentum to continue, driven by several factors: a rapid reopen of the U.S. and global economies due to increased vaccine availability; fiscal and monetary stimulus; pent-up consumer demand; and massive savings. On fiscal stimulus alone, at the end of December 2020, governments around the world had committed US$7.8 trillion in foregone revenues or fiscal spending programs, with an additional US$6 trillion in liquidity support. Historically, fiscal stimulus can take months to years to fully work its way through economies. We believe we’ll continue to feel the positive effect of this stimulus through the remainder of this year and into 2022.