Although there have been some vaccine setbacks, overall, vaccine distribution in the United States has been a success. As of the end of April, approximately 56% of the adult population or 146 million people have received at least one dose of the COVID-19 vaccine. Furthermore, 40% or 105 million American adults have been fully vaccinated, according to the CDC.[i] As children age 12-15 become eligible to receive the Pfizer COVID vaccine, further hopes for herd immunity and reopening of the American economy come closer to becoming a reality. For the economy, that translates into higher GDP as people venture out of their homes and spend more on discretionary items. For the stock market, that optimism translates into higher share prices. However, the COVID recovery has not been equal globally.
As of late, the U.S. and Europe could not have more divergent economic fortunes as both global powers work to recover from the 2020 COVID pandemic. Real Gross Domestic Product (GDP), or the total value of all goods and services produced within the country, grew in the U.S. by an annualized rate of 6.4% in the first quarter of 2021. That is in addition to the 4.3% growth rate in the last quarter of 2020. Relatively speaking, that is the second fastest pace of growth America has seen since the second quarter in 2003.[ii]
The Bureau of Economic Analysis noted the rise in real GDP reflects the increased spending by American’s, who may have felt confident to spend money for the first time in a year after battling the economic uncertainty of COVID. Spending was primarily concentrated in motor vehicles, food & beverages, technology and federal government spending related to COVID. Additionally, the personal savings rates of American’s was at $4.12 trillion as of March 2021, compared to $2.25 trillion in the fourth quarter of 2020. [iii] The last time savings rates were that high was during World War II. Many anticipate that as the pandemic eases, cash on the sidelines may be infused into the economy, further supporting U.S. economic growth the remainder of 2021.[iv]
By contrast, the euro zone’s GDP declined by 0.6% in the first quarter of 2021, as the region battled a third wave of COVID infections and many countries employed new lock-downs. This marks the second consecutive quarter of contractions for the region, meaning the euro zone is technically in a recession. Germany, Italy and Spain each had a decline in activity, with France as the outlier with better than expected growth of 0.4% in the first quarter. However, outlook for Europe is generally positive starting in mid-2021. The vaccination campaign has accelerated significantly since the start of the year and the region is expected to reach pre-COVID GDP growth rates, similar in fashion to the U.S. Additionally, countries in the region are beginning to receive EU Covid support funds which should stimulate the euro zone economy. The European Commission asked its member nations to spend at least 37% of the stimulus on climate policies and 20% on digital upgrades. [v]
While it may be counterintuitive, now may be an excellent time to re-examine overweight domestic investment portfolios that have peaked as the S&P 500 reached record highs. Some of your domestic gains can be locked in and reallocated to buy international equity investments while they are still priced relatively low. A well-diversified investment portfolio should include both large and small U.S. investments as well as large and small international investments. Generally speaking the U.S. and international asset classes tend to be inversely correlated, meaning they have a contrary relationship. Typically when the U.S. is doing well, the international asset class tends to have flatter performance. Conversely when the U.S. is not doing well, that tends to be when international investments shine. While the U.S. had great growth in the last year, it is expected that the growth rate in 2022 will not be as robust as the COVID stock market recovery that started in March 2020. When the U.S. growth flattens, investment growth opportunities may be best realized in international investments. Diversification allows you to spread out your risk, like the opposite of putting all your eggs in one basket. Therefore, in a properly diversified investment, you can have balanced exposure to major asset classes that allow you to capture growth domestically or internationally without the stress of timing the market, or buying and selling at the perfect time.
On top of typical market rotations, the U.S. also has variables in the near-future that could significantly affect upcoming growth. For one, the trade agreement with China, stalled in 2019 due to COVID, is slowly resuming. The agreement between the U.S. and China could have significant impact on inventory levels, supply chain management, and cost of inputs which would affect businesses who import goods. Further, President Biden has proposed approximately $4 trillion dollars of spending, outlined in two plans: the Infrastructure and Clean Energy plan, and the American Families plan. While the plans are still in beginning stages, the proposal to increase taxes on American corporations could have an effect on corporate share prices, the cost of goods and services to Americans, and future inflation.
One of the best tools to combat stock market volatility and utilize economic rotations to realize profits is a diversified investment portfolio that employs rebalancing, a strategy that locks in gains in high performing asset classes and invests the gains into underpriced market sectors at a bargain. Many investors have performed well by luck in the last six months. However, it may make sense to get a second opinion on how to position yourself for the uncertainties of the market ahead. Don’t take two steps forward and one step back. Reach out to your Certified Financial Planner™ timely to prepare for whatever lies ahead.