The Combination Of Loose Monetary Policy And Large Fiscal Stimulus

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The Combination Of Loose Monetary Policy And Large Fiscal Stimulus
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Insights into the market and economic conditions from the wealth advisors and portfolio managers at Bel Air Investment Advisors, an investment firm that focuses on overseeing and managing the over $8 billion in assets for 300 high-net-worth families, individuals and foundations. They discuss President-elect Joe Biden’s fiscal stimulus plan, the loose monetary policy, coronavirus vaccine distribution, oil and copper prices and much more.

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COVID-19 and the vaccine are the most important thing right now, especially for it to roll out quickly and inoculate people as soon as possible. Once the vaccine is all rolled out, we COULD see a small correction in the market.”

“Going into the Biden Administration, the market will be fine. It could even increase 10% as Biden plans to add several trillion to the stimulus and create an infrastructure, which will put people back to work and give them more money to spend.”

“The friendly Federal Reserve Board is also very important, and we should see the economy grow at 6% compared to an average of 2% in the past decade. We also expect corporate profits to increase 30% in 2021 and 30% again in 2022, and recommend people to own more stocks as the bond money matures.”

The Success Of Vaccine Distribution And The Economic Plan

Kevin Philip, Managing Director

“The market is motivated by two primary influences: the success of vaccine distribution and the economic plan which Biden roles out.”

“In my opinion, vaccine rollouts going forward will be faster than the skeptics fear because of a combination of who opts out and a Biden Administration plan to facilitate increased production.”

“The economic plan from the incoming administration, bolstered by Democratic control of Congress, is likely to be profoundly accommodative to economic growth and the stock market. While Biden has gone on record wanting a bipartisan deal on the matter initially, there would not be anything preventing him from pushing additional stimulus through, with the legislative process of reconciliation with a simple majority, if the initial plan proves too small.”

“The amount of cash on the sidelines remains high, as does the savings rate. This could be fuel for equities going higher, especially with year over year earnings comparison in 2021 being an additional tailwind.”

“Interest rates, on the short-term at least, will likely be zero or near zero for the foreseeable future.”

“And finally, pent-up demand unleashed by a vaccinated consumer will likely lead to a period of consumption like we have not seen in our lifetimes.”

Strong Fiscal Stimulus With Loose Monetary Policy

Carl Ludwigson, Director of Manager Research

2021 will likely see a recovery in economic growth, corporate earnings, and risk markets.

“In contrast to 2020 that marked a global contraction of around 4% due to the COVID crisis, 2021 will likely be an expansionary year with the global economy growing over 5%, led by emerging markets and in the developed economies by the United States. Due to the ongoing COVID crisis, most of the recovery is likely to be evident after the spring of 2021.”

Strong fiscal stimulus with loose monetary policy will likely facilitate growth in the U.S.

“Congress recently approved a $900 billion stimulus program likely to boost consumer spending. With Democratic control of the Senate, we expect further stimulus. The Fed appears sanguine about inflation citing unemployment and sub-optimal resource utilization. They are unlikely to raise rates in the near future and will likely continue to purchase Treasuries and mortgage-backed securities at the current rate.”

Equity returns will likely depend on the pace and participation of the vaccine rollout.

“While a lot of the good news in the equity markets got priced in post-vaccine announcements, we continue to be constructive on equity markets, expecting high single digits to low double-digit returns for 2021, led by Emerging Markets globally and by small caps. Despite a decade of strong returns, we continue to believe technology and healthcare will likely perform well due to the proliferation of technology across all sectors and the aging population, respectively. Low-interest rates and low inflation support current valuations.”

“Key risks to our outlook are: (1) extended COVID-19 lockdown, (2) political risk, (3) escalating trade war; (4) dollar strength; (5) corporate leverage; (6) increased regulation (7) inflation shock.”

Dr. Copper Forecasts A Better Economy In 2021

Craig Brothers, Senior Portfolio Manager & Co-Head, Fixed Income

Biden Agenda

The agenda will favor labor or capital, the worker’s interest, or the corporation’s interest. Biden is comfortable using additional fiscal packages to help offset the economic weakness. An Infrastructure Bill is likely this summer, which will include government jobs/contacts.

Democratic Control

The House, Senate, and Presidency are in Democratic control. The Democrats control which bills are put to vote and will swing the focus to their agenda. One of Biden’s first proposals is to raise the minimum wage from $7.40 to $15 per hour. Any large increase in the minimum wage will ignite inflationary pressures.

Fiscal Policy

Biden has proposed increasing the latest fiscal package by $1 trillion. As many as 150 million American’s will receive an additional $1400 stimulus check. Many US workers are speculating in the equity market with their stimulus money.

Interest Rates

The bond market is wary of the combination of loose monetary policy and large fiscal stimulus. The Federal Reserve is committed to keeping rates in check until inflation exceeds 2% for at least one year. The 10yr US Treasury has moved up from a low of .50% to 1.08% with the conditions ripe for further advances toward 2%.

Monetary Policy

“Monetary policy remains historically accommodative with Fed Funds at .25 and the Fed purchasing $80 billion of US Treasuries and $40 billion of mortgage-backed securities each month.  The Fed has made a commitment to hold off on rate hikes until inflation meets and then exceeds their target. Currently, deeply negative real yields correlate with a weaker dollar.”

Fiscal Policy

“The record $2.2 trillion Cares Act stimulus package has opened the door to the passage of another large stimulus bill. A second stimulus package is projected for the first quarter in 2021. The combination of a recovering economy and more fiscal stimulus will pave the way for an uptick in inflation.”

Oil

“Lower oil prices have led to a reduction in investment by the big oil exploration companies. The Baker Hughes Rotary Rig Count equaled the low reached in the recession of 2009. This drop-in supply leaves the market unprepared for an increase in demand. A vaccine in 2021 will boost demand and lead to sharply higher oil prices.”

Copper

“Copper is said to have a PhD in Economics, following a 60% increase in price since March, Dr. Copper is forecasting a better economy is 2021. Standing at a 7-year high, copper is signaling an infrastructure boom next year.”

Summary

“In summary, unprecedented monetary and fiscal policy, a weaker dollar, and higher commodity prices provide the backdrop for a normalization of interest rates from the record low yields of 2020. We are bearish on bonds and expect the 10-year Treasury to exceed 1.50 % in 2021.”

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