The allure of reinvention and the promise of a better tomorrow is one that most of us have held on to at different stages of the past year. Now, with vaccination rates increasing in the US and the easing of restrictions, it seems that reality is starting to catch up to our wildest dreams and markets have banked on the excitement.
Markets are on the bounce, and last week major indices recorded new all-time highs. The week began with the Nasdaq closing at a record level for the first time since February with a 0.9% increase. This was followed by a new record for the S&P500 index, which had a 0.7% increase on Thursday.
This optimist trend has been spurred by a promising economic growth in the first quarter of 2021 as the US Department of Commerce reported the fastest growing quarter since 1984. The economy grew at an annualized 6.4%, beating economists’ expectations who had predicted a 6.1% increase. The US economy has made up a lot of ground in the last three months, as real GDP is now just 1% lower than its pre-pandemic level.
GDP growth has been boosted thanks to an ambitious $1.9 trillion government spending plan that was passed by both houses of Congress in March. Growth has also accelerated as a result of increasing vaccination rates and states loosening lockdown restrictions. The US has administered 234 million doses, more than doubling President Biden’s initial goal of 100 million doses during his first 100 days in office.
Consumers, in particular, seem eager to get back out and start spending, drawing from a combination of disposable income, stimulus checks and savings. Personal consumer expenditure rose at an annualized rate of 10.7% last quarter as commerce opened up across states.
What is most surprising is how well investors have taken the positive attitude that lingers in the US economy. The volatility that has characterized financial markets since the onset of the pandemic and which reached its height during the Game Stop debacle has begun to ease. The Vix index - a measurement of the volatility of the stock market based on the S&P500 index options being traded – dropped to 17.64, merely a fifth of its value during the most volatile period in the last year.
Investors have sustained their bullish attitude despite the concerns over inflation that are normally associated with greater than expected economic growth. The yield on 10-year US government bonds has risen to 1.68%, indicating a fall in the price of the bonds as investors shift to other commodities.
The rose-tinted lens that now befalls on the American economy has also freed capital for banks that had previously been reserved to cover loans that were likely to default under grimmer economic conditions. As a result, banks once again are declaring profit margins of over 20%, and the newly available capital has significantly increased activity in stock and bond markets. The US economic recovery has motivated traders to look ahead at other economies which are behind in their vaccine rollout, such as Europe, in the hopes of banking on their eventual recovery by investing early in those markets.
Perhaps the optimist attitude that has overtaken markets speaks to our shared experience during the pandemic and the feeling of having a year stolen from our lives. There appears to be a revengeful air across everyone’s minds and a strong desire to make up for the lost time. The thought of things going back to normal (Does anyone else feels like barfing when they hear that phrase these days?) appears to be materializing before us, and it is tough to resist it after a year indoors. Just ask your mates how many events they already have booked after June 21st; there is optimism in the air.
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