A First Quarter to Remember
With the first-quarter earnings season officially starting, Wall Street has focused its attention on how companies’ businesses fared in the past three months. Many analysts anticipate impressive results, especially given how strong the U.S. economy and stock market were during the first quarter. So, before the earnings reports start rolling in, let’s consider what exactly occurred during the first quarter of 2021.
Notably, given that COVID-19 cases and hospitalizations dropped dramatically with the rollout of the vaccine, more and more states loosened their COVID-19 restrictions during the first quarter. Several states even lifted mask mandates/indoor dining restrictions, including Arkansas, Arizona, Connecticut, Maryland, Mississippi, Texas, West Virginia, and Wyoming.
More states reopening small businesses, restaurants, and retail locations at full capacity significantly impacted the U.S. economic recovery in the first quarter. For example, the latest unemployment report from the Department of Labor revealed that we saw 916,000 jobs added in March. That crushed economists’ expectations of 660,000 jobs for the same period.
It’s also important to note that January and February’s job creation increased from previous estimates, as well. The Department of Labor reported 233,000 jobs added in January and 468,000 jobs created in February, up from previous estimates of 166,000 and 379,000, respectively. And while the job numbers went up, the unemployment rate dropped to 6.0% in March, down from 6.2% in February.[1]
As you may know, consumer spending plays a huge role in the U.S. economy; it accounts for nearly three-quarters of total GDP growth. When you couple the fact that more Americans started working again in the first quarter with the latest round of stimulus checks, it’s not too surprising that retail sales also surged in the past three months.
The Commerce Department announced that retail sales soared 9.8% in March, exceeding economists’ expectations of a 5.5% rise. February retail sales were revised to show a 2.7% dip, and January retail sales jumped 7.6%. Overall, the U.S. consumer was alive and well in the first quarter.
Thanks to the improving economic data, economists have increased their GDP estimates for the first quarter and full-year 2021. The Atlanta Fed now expects the U.S. to achieve 6.0% GDP growth in the first quarter. The International Monetary Fund (IMF) also recently projected that the U.S. economy could grow at a robust 6.4% pace in 2021.
Our own central bank also has a rosy outlook for this year. The Federal Reserve acknowledged that “economic activity and employment have turned up recently” in the U.S. The Federal Open Market Committee (FOMC) even noted that it looks for GDP to expand at a 6.5% annual pace in 2021, which is up from previous forecasts for 4.2% GDP growth.[2]
Even with the solid economic outlook, the Fed still sees weakness in a few corners of the market due to the COVID-19 pandemic, and inflation currently remains below its 2% target. As a result, the Fed has no plans to increase key interest rates in the near term. In fact, the Fed doesn’t expect to raise key interest rates until at least 2024.
Interestingly, the Fed expects inflation to climb to about 2.4% in 2021, as discussed in a recent Nicollet Navigator article. Wall Street is also concerned that inflation is brewing, which ignited a surge in bond yields during the first quarter. The 10-year Treasury yield soared more than 80 basis points in the past three months, and it currently stands at about 1.67%. Remember, higher bond yields equate to lower bond prices—and that means the bonds are worth less.
Overall, though, Wall Street was in a positive mood during the first quarter, cheering the Fed’s ultralow interest rate policy and the solid economic recovery. As a result, the broader indices didn’t just start the first quarter at all-time highs, but they also ended the first quarter at new all-time highs. The S&P 500 and Dow rallied 5.8% and 7.8%, respectively, in the first quarter—and both indices are currently trading near recent all-time highs.
After the first quarter, one must wonder if it has set the precedence for the rest of the year. Will the stock market continue to climb higher as the U.S. economy recovers from the COVID-19 pandemic? And will bond yields also continue to rise, further eroding their value?
In this environment, you may be wondering what the best path is forward. Give us a call at Nicollet Investment Management today, and we would be happy to discuss your financial goals and create an investment roadmap for you.
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[1] https://finance.yahoo.com/news/march-jobs-report-labor-market-pandemic-unemployment-payrolls-181729856.html
[2] https://www.cnbc.com/2021/03/17/fed-decision-march-2021-fed-sees-stronger-economy-higher-inflation-but-no-rate-hikes.html