Everywhere you turn there’s a dazed soundbite these days.
The overt nature of the fiscal-monetary nexus on display in the US has left analysts somewhat bereft when it comes to forecasting. Not that sell-side forecasts have a sterling track record. But typically, one can discern a sense of confidence in various targets, no matter how misplaced it might turn out to be.
Not so much in 2021, though. Not only did last year remind us that anything can happen, the sheer scope of the policy response both on the fiscal and monetary side, is off the charts. Figuratively and literally. The US stands out for being “on its own planet,” to quote BofA, on some key metrics (figure below).
Now, with another $1.9 trillion in the process of being injected into the veins of the still groggy US economy, and the Biden administration gearing up to craft a long-term recovery package that’s expected to carry a price tag in the trillions (plural), it’s become next to impossible to predict what happens going forward.
One thing analysts are finding it exceedingly hard to be is bearish, unless you’re talking about bonds. “It’s still difficult to see the prospective rise in rates as challenging the overall direction of equities when the starting level of rates is so low in nominal and real terms, when the equity risk premium is reasonably high and when earnings growth is so strong,” JPMorgan said, in a note outlining the bank’s first impressions of what a Biden infrastructure push might mean for markets.
“For those who compare the relative value of equities versus bonds via the earnings yield to real bond yield framework, the spread between those two variables remains above average, at about 5%,” the bank went on to say, noting that’s “almost always been sufficient to deliver equity outperformance versus bonds over the year, barring a major macro shock.”
Everything is a relative value argument at this point. Or at least that’s the way it seems to me, and I read more sell-side research than it’s probably healthy to consume.
On the broader economic outlook, some of the commentary now comes across as almost euphoric. In a note dated March 14, Morgan Stanley’s Chetan Ahya recapped Ellen Zentner’s take. “Our chief US economist is forecasting growth of 7.3%Y in 2021 and 4.7%Y in 2022, almost 2 percentage points above consensus this year and 1 percentage point next year,” he said, on the way to observing that “this gap between our estimates and consensus is, as far as I can remember, the widest ever.” And consensus is hardly what one might describe as “bearish,” so that’s saying something.
Morgan Stanley has been pretty steadfast in championing the “V-shaped” narrative since the crisis first spiraled a year back. With the exception of some turbulence in and around the winter COVID wave, that’s been a solid call, all Larry Kudlow jokes notwithstanding.
Driving the point home, Ahya spoke to the specifics of the bank’s US outlook. “From Q3 onwards, we expect US GDP to overshoot the path it was projected to follow before the recession,” he said. So, the outlook for the US is now better than it would have been had there been no pandemic. Or at least according to Morgan Stanley.
The rationale is simple. It essentially revolves around the notion that the pandemic has jolted policymakers into action, and brought forward the kind of fiscal-monetary partnerships necessary to catalyze robust growth outcomes. I’ve always said that if there was a silver lining in the pandemic, that would be it.
Of course, robust economic growth isn’t going to bring any of the 2.65 million people (globally) dead from the virus back to life, but with any luck, it could mean a better existence for their surviving relatives.
As Morgan’s Ahya put it, “we have focused on the regime shifts in monetary and fiscal policies, with policymakers aiming for a high-pressure economy in response to a profound exogenous shock.”
Moreover, fiscal policy isn’t just cushioning the blow. It’s going above and beyond. “Transfers to households have already exceeded the income lost in the recession,” the same note said, adding that,
As reopening gathers pace, the labor market is poised for a sharp rebound. This implies that consumption growth in 2021 will be supported by wage income and transfers, with little reliance on excess savings. The excess saving stock will still rise to a peak of $2.3 trillion in Q321. Even for 2022, we are building in only a modest drawdown of the excess saving to $2.14 trillion (8.7% of GDP) by year-end. A faster-than-expected drawdown will pose upside risk to growth.
In other words, the economy could conceivably run even hotter than Zentner’s already above-consensus outlook.
For those curious, Ahya does express some concern about the longer-term ramifications for inflation, but that’s still some way off. He reckons it’s possible that inflation may rise above 2.5% midway through next year, forcing a quick rethink of the Fed’s rate path, possibly catalyzing volatility in markets. That’s pretty consistent with similar warnings from all manner of market participants and economists. Over the weekend, Janet Yellen again downplayed the risk of a sharp and sustained rise in inflation.
Outside of inflation concerns, there’s chatter about higher taxes, but just like the inflation goblin, tax hikes are generally being viewed as “tomorrow’s problem,” where “tomorrow” means 2022 at the earliest.
In the here and now, the message is simple. As one strategist who spoke to Bloomberg on Monday put it, “US equities have become a buy high, sell higher asset class.”