The economic recovery continued in the first quarter. All sectors of the economy experienced growth during the quarter, and the major market indexes posted healthy gains.
Now that the pandemic crisis is fading, investors should look for signs of continued economic recovery. The labor markets are showing considerable underlying strength. Unemployment declined to 6% in March, the lowest since the onset of the pandemic last year, and not far from the 5% level generally thought to be “full employment”. In most parts of the economy, jobs continue to grow at a healthy rate. Some sectors of the economy continue to struggle, including hospitality, leisure, and entertainment. For employment to fully recover, these sectors will need to see significant improvement. Fortunately, widespread vaccinations will make it much easier for these industries to reopen and recover.
COVID-19 Vaccinations Have Reached an Inflection Point
In late January, the COVID-19 vaccination campaign reached a critical milestone. At that time, the number of Americans with COVID-19 immunity through vaccination exceeded the number of Americans with some form of immunity through previously having been infected with the virus.
By the end of the quarter, total vaccinations reached 90 million, three times the total number of cases to date in the United States. Public health experts continue to debate the number of vaccinations required to achieve herd immunity. No matter what that number turns out to be, it is clear we are closer than ever.
Higher Interest Rates, Inflation, and Taxes Ahead
The Federal Reserve remains committed to keeping short-term interest rates low to support the economy. The Fed continues to indicate a willingness to tolerate higher levels of inflation as long as the economy continues to recover. For investors, this means that sitting in cash is not a safe alternative for long-term wealth. Cash holdings should be driven by your financial plan and spending needs, not by fear of what might (or might not) happen in the markets. Longer-term interest rates have started to move higher, although they are still well below pre-pandemic levels.
Congress is currently considering several infrastructure and spending bills. Combined with the pandemic-related stimulus measures, Federal government deficit spending will likely reach levels not seen since the second world war. In the longer run, well-run infrastructure programs will lay the foundation for future economic growth. However, tax increases accompanying these programs could act as a drag on economic growth in the near term.
For investors, the best strategies are the ones we’ve advocated for decades. Take the right risks, in the right places. Know what you own, and why you own it. Have a solid financial plan. Save money, invest wisely, and make sure your investments support your financial plan. If you do the right things, in the long run financial independence will follow, no matter which way the winds blow in the short run.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer