But that sentiment suddenly changed when former President Donald Trump banned travel from most of Europe and the World Health Organization officially declared Covid-19 a pandemic on March 11th.
Most recently: Many of the hallmarks of 2020 are still evident – and not just in blockages, social distancing and work from home. The exuberance that has defined stock markets over the past 12 months has continued to push stocks to historic highs this year.
Also, the coronavirus is still with us, but investors are now making a quick and strong recovery as vaccine launches accelerate and the United States prepares for another huge stimulus package.
Goldman Sachs predicts a 7% increase in US GDP in 2021, a level not seen since 1984.
High risk: Like last year, equity investors could underestimate the size of potential obstacles. Ironically, a booming economy may not be good for equities, as it could increase financing costs for companies and affect their main selling point: higher returns.
While a strong recovery is good for corporate earnings, higher rates make debt more expensive, which could become a problem for companies that borrowed heavily during the crisis. Stocks also look relatively less attractive as bond yields rise.
Keep calm: The Federal Reserve has made it clear that it is willing to tolerate higher inflation if it means that business is recovering and unemployment is declining.
Given that the US labor market still has about 10 million jobs since the pandemic hit, it may be some time before rates are lifted off the floor.
“The fund will remain supportive of equities in 2021,” Roger Jones, chief equity officer at London & Capital, told me. “The long-term structural winds of inflation – demographics, technological advancement and high debt levels – are stronger than ever. In addition, stocks can cope with inflation as long as it is not sustained above the 3% level,” Jones said.
The European Central Bank could have a new problem
A sustained rise in consumer prices may seem far from Europe, where economic activity remains severely constrained by bottlenecks, stimulus is limited and this year’s GDP growth prospects have weakened.
However, inflation has ticked in the region and if bond yields continue to rise, policymakers may be forced to act.
What’s happening: The European Central Bank is meeting on Thursday and investors will want to know how it thinks about inflation. They will also want some assurance from ECB President Christine Lagarde that the central bank does not intend to tighten funding conditions.
“The ECB will first and foremost try to minimize the recent rise in bond yields, calling it small, driven by technical factors and focusing on real yields,” ING research chief Carsten Brzeski wrote on Friday.
Brzeski expects the ECB to stress that asset acquisitions could be increased, if necessary, and move to the early stimulus in the coming weeks to maintain favorable financing conditions.
See here: In an interview with The Economist Lagarde last month, he said the ECB had used around € 800 trillion ($ 955 billion) in its € 1.8 trillion emergency purchase program. ($ 2.1 trillion).
“We have many more. If we need them all, we will use them all,” she added.
However, as recent volatility in bond markets indicates, much may change in a few weeks. With the reopening of savings, a sudden rush for goods and services could cause companies to raise prices. Excess economies in Europe will also affect the recovery if households spend some of this extra money.
“Once restrictions are lifted and fear of the virus recedes, it is reasonable to expect prices to rise,” ING economists, including Brzeski, wrote in a note last week. “Global inflation in the eurozone could easily accelerate above the magic level of 2% this year.”
Overview: At least for now, Europe’s economy seems far from overheating. GDP contracted again in the last three months of last year amid new bottlenecks, and with many of these measures still in place, growth is unlikely to do much better in the first quarter.
A slow recovery of the vaccine and a relatively modest stimulus will also affect Europe’s recovery. In the absence of wage growth, the ECB is unlikely to react to short-term inflationary movements, Brzeski said.
It follows
Friday: US PPI and consumer sentiment, EU industrial production