After a volatile month, the S&P 500 finished at a record high when the markets closed on March 31^st. The index finished the month up 4.24% and is now up 5.77% on the year. As the economic recovery continues, the Dow Jones Industrial Average led the monthly performance numbers as it finished up 6.62% and is now up 7.76% on the year. The technology heavy NASDAQ finished the month in positive territory, but it continues to lag the other two indices after outperforming both in 2020. The index finished the month up 0.41% and is now up 2.78% on the year. Small cap stocks continued to inch higher as the Russell 2000 ended the month up 0.88% and is now up 12.44% on the year. The MSCI EAFE index is up just under 3% on the year after a positive month, however the MSCI Emerging Markets index fell 1.70% during the month and is now up 1.95% on the year. The Bloomberg Barclay’s U.S. Aggregate Bond index fell 1.25% in March and is now down 3.37% on the year.¹

Source (1)

As has been the case for much of the last year, the economy is shaped in large part by the pandemic and our country’s policy response to challenges that have come to light because of the virus. The first quarter of 2021 was one of transition. There was the transition in the White House and on Capitol Hill, and towards implementation of the Covid-19 vaccine. The transition in Washington, D.C. will dictate our country’s policy response to the virus while the vaccines have taken center stage regarding the pandemic.

Since March of 2020, the economy has experienced a massive drop followed by a surge and we continue to inch forward in our new social distancing driven economy. Final numbers for GDP growth in the fourth quarter of 2020 came in at 4.3%.² The month of March closed with strong economic numbers and estimates for first quarter GDP growth are now at 6%. GDP numbers are seasonally adjusted annual rates. In March, personal consumption growth increased from 5.6% to 6.9% and private investment growth increased from 2.4% to 6.9%.³ The ISM Index also reaching its highest level since 1983 as it climbed to 64.7 in March, up from 60.8 in February.⁴ Goldman Sachs now estimates GDP to finish the year up 8% year over year which would signal a full recovery to pre-pandemic levels. For reference, U.S. GDP has not grown 8% in a year since 1951.⁵

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Nonfarm payrolls increased by almost 1,000,000 in March and the unemployment rate fell to 6.0%, an improvement from 6.2% in February.⁶ Unemployment reached its pandemic peak of 14.8% in April of 2020. After the announcement of the most recent stimulus package in March, the Fed estimated inflation will reach 2.4% this year, above its previous estimate of 1.8%.⁷ Earnings for companies in the S&P 500 were down 11% in 2020, however, they are projected to increase by over 25% in 2021.⁸ That is positive news for equities, but we do want to exercise caution as we look at estimates in 2022. Higher interest rates could cause wage growth, there is the potential for higher corporate taxes, and the economy could slow as we enter 2022. Regarding the Fed, following their recent meeting on St. Patrick’s Day in March, they plan to maintain the target federal funds rate of 0-0.25 bps through 2023 and continue bond purchases throughout the remainder of 2021.⁹ If the economy does perform as well as expected to close out 2021, it’s possible that the Fed may need to taper back bond purchases in 2022 to curb fears of inflation. As of now, inflation is still in a relatively comfortable range, but it is worth monitoring as more financial stimulus enters the economy.

As the first quarter came to an end in 2020, we were still in the early stages of the pandemic, local governments were just starting their lockdowns, and every news station had a permanent number on the side of their screen tracking the growth of coronavirus cases. Twelve months later we are still tracking cases and fatalities, but just as important is tracking our progress towards herd immunity. Herd immunity can potentially be achieved through a combination of tracking those that have been infected by the virus along with those that have been vaccinated. The first image below shows the large decrease in cases and deaths on a 7-day moving average in the first quarter of 2021 due in large part to the roll out of the vaccines. As you can see in the second image, the total number infected by the virus is starting to plateau and the number of those vaccinated is beginning to increase.

The percentage of the population experiencing immunity has increased to over fifty percent at the end of the first quarter, and J.P. Morgan’s analysts project that we will enter the 60-80% zone of herd immunity in April (65%) and surpass the zone by the end of the second quarter (85%).¹¹ These numbers are supported by the image below showing the results of a recent Gallup poll. The percentage of Americans willing to get the vaccine has increased from 50% in September of 2020 up to 74% in March of 2021.¹² The important note is that we are making progress towards herd immunity. These numbers lead us to believe that we will be in a much better spot regarding the pandemic as we enter the third quarter of 2021.

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The plan was an economic aid package designed to help Americans and businesses survive the pandemic downturn. However, the plan did little to advance Biden’s long term economic agenda when it comes to infrastructure and transitioning to renewable energy, so on Wednesday, March 31^st, President Biden introduced the American Jobs Plan. The bulk of the plan is to be spent on infrastructure with over $600 billion dedicated to transportation infrastructure (highways, public transit) and another $600 billion going to community infrastructure (clean drinking water, housing, schools, VA hospitals). $580 billion will go towards research and development, manufacturing, and workforce development. The plan is rounded out with $400 million dedicated to improving elderly care.¹⁴ The plan will still need to go through Congress, but it is likely that at least some trimmed down version of the plan is passed. How is the plan going to be funded? The likely solution is Biden’s Made in America Tax Plan that would undo a lot of changes from former President Trump’s Tax Cuts and Jobs Act in 2017. The main change is raising the corporate tax rate from 21% to 28% which is expected to raise the $2 trillion needed for funding over the next 15 years. The American Jobs Plan is the first of two plans that Biden will introduce following the passing of the American Rescue Plan. The next plan, likely to be introduced in April, will be the American Family Plan that will aim to address healthcare and education.¹⁵ This plan will also try to extend benefits to lower and middle-income earners targeting three programs: expanding the Earned Income Tax Credit to help more Americans over the age of 65, the Dependent Care Credit for help with daycare allowing both spouses to return to work, and the Child Tax Credit.¹¹

1 https://www.investing.com/indices/major-indices

2 https://www.bea.gov/news/2021/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-4th-quarter-and

3 https://www.frbatlanta.org/cqer/research/gdpnow

4 https://www.cnbc.com/2021/04/01/ism-manufacturing-march-2021.html

5 https://www.axios.com/goldman-sachs-us-economy-grow-8-per-cent-2021-eb7e1d84-b6fa-483a-9e19-37a7faddadc0.html

6 https://www.cnbc.com/2021/04/02/us-jobs-report-march-2021.html

7 https://www.cnbc.com/2021/03/17/heres-where-the-federal-reserve-sees-interest-rates-the-economy-and-inflation-going-in-the-future.html

8 https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_032621A.pdf

9 https://www.federalreserve.gov/monetarypolicy/files/monetary20210317a1.pdf

10 Centers for Disease Control and Prevention, Johns Hopkins CSSE, Our World in Data, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of March 31, 2021.

11 https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

12 https://news.gallup.com/poll/342431/satisfaction-vaccine-rollout-surges.aspx

13 https://www.statista.com/chart/24395/composition-of-the-american-rescue-plan-act/

14 https://www.investopedia.com/what-s-in-joe-biden-s-usd2-trillion-american-jobs-plan-5120273

15 https://www.forbes.com/advisor/personal-finance/biden-american-jobs-plan/

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