The Week Ahead: Green shoots in springtime

As far as markets were concerned, February 19 marked one year since the twenty-first century plague hit and saw stock markets peak before a slide that turned into a full-blown panic. The novel coronavirus which started in Wuhan had spread to the West and the images which we thought would not happen here, became a reality fairly quickly. 

From the FAANGS to Zoom to Signal to GameStop and back to Facebook, stock markets have performed the quickest about-turn ever with exuberance now clearly evident in many asset classes. When nearly 30% of the world’s investment-grade debt is negative yielding, there is no alternative for speculative investors looking for a home. Witness the uber-outperformance of the cryptocurrencies which dominate all other assets over the 12 plague months. The preposterous $146,000 target by a leading investment bank at the start of the year doesn’t sound so laughable now, does it?

But enough of this chatter about irrational behaviour, it sounds more like an ode to not listening to FOMO. Ground-breaking vaccine development and record rollouts have now put us into a position where we are speculating on what happens next, kind of like the bit after winning a war, whisper it quietly. Once we are vaccinated, how quickly will we return to pandemic-affected activities? Surveys from North America suggest around a third of people will do so across most endeavours and this should build with confidence. But perhaps this is too binary in nature with polarised assumptions on how everyone will, or how nobody will. 

This brings us nicely to the week ahead which may point to what happens in the second half of the year when we are, judging from the weekend headlines, pretty much all vaccinated in the UK, with US playing catch up. We may see some progress on the $1.9 trillion fiscal stimulus bill with a vote going to the House floor by the end of the week. This suggests another tough week for bonds and possibly more support for the dollar, though the greenback has struggled even with the recent 20bps jump in US real rates. Fed Chair Powell has the task of expressing modest confidence in the recovery while keeping tapering talk at bay in the meantime,when he delivers his semi-annual testimony on Tuesday.

But it is stimulus-fed growth and specifically income growth which will be a big determinant in Americans behaviour as vaccines are deployed. Personal incomes likely grew by over 11% in January and with the new President’s plan for another $1,400 cheque due soon, economists reckon this equates to another mind boggling $5.6 trillion lift to personal incomes in April, if passed next month. Even if it is a smaller package, this type of income growth in consecutive quarters has never been seen before. 

Such a massive positive income shock comes on top of a large overhang of accumulated extra savings. So, what will the US consumer do with all this potential spending capacity? Let’sjust say Bloomberg’s consensus annualised estimate of 2-3% during the first quarter of this year may have some catching up to do on the 9.5% predicted by the Atlanta Fed’s ‘nowcast’ estimate.