The imminent passage of Joe Biden’s stimulus plan is sending a jolt through Wall Street, with one prominent forecaster declaring the stage is now set for the fastest U.S. expansion in more than 60 years.
Mr. Biden’s US$1.9-trillion relief plan, expected to win final approval in Congress on Tuesday, will help drive the pace of year-over-year growth in gross domestic product to 9 per cent by the end of this year, according to Nancy Lazar, head of economic research at Cornerstone Macro in New York.
“We have never seen anything like this in our investment careers,” Ms. Lazar said in an online client meeting. If her growth forecast is accurate, the bounce this year will constitute the biggest U.S. expansion since 1959.
Her new outlook, which is substantially more optimistic than her previous forecast of 7-per-cent growth, adds to a recent torrent of optimism from analysts and economists.
Deutsche Bank’s latest U.S. update, for instance, shows U.S. GDP rising above its prepandemic pathway before year-end.
“As recently as last quarter, no economists expected such an outcome for this year, and most had placed such a trajectory on course for next year – or even 2023,” wrote Gregor Macdonald, publisher of the Gregor Letter on energy and economics.
Forecasts for corporate earnings have also been spiralling higher. Only three months ago, Mr. Macdonald says, it appeared highly unlikely that 2021 earnings for the S&P 500 would match the US$163 a share recorded in 2019. Now consensus earnings estimates have risen to US$174 for this year and US$200 for next year.
Exuberance is in bloom for two reasons. Vaccines have rolled out rapidly, with more than two million Americans a day now being inoculated. Meanwhile, Mr. Biden’s massive relief plan is on the verge of being passed by Congress, rather than being whittled back as many economists and analysts had predicted.
“I was a bit naive,” said Ms. Lazar, who is one of the 100 most influential women in U.S. finance, according to Barron’s magazine. She had expected legislators to cut back the stimulus package to around US$1.2-trillion.
Instead, at the full US$1.9-trillion requested by the administration, the package is big and broad enough to reshape the contours of the recovery. Ms. Lazar expects consumer spending to grow 10 per cent this year – “and that is not an aggressive estimate,” she insisted – while unemployment plunges to 3.5 per cent by year-end from 6.2 per cent today.
The prospect of aggressive stimulus has prompted fixed-income investors to fret about the possibility of higher inflation ahead and demand higher bond yields. But Ms. Lazar sees little reason to worry about inflation getting out of control.
She agrees that inflation indicators will likely jump this spring in large part because year-over-year inflation numbers will be calculated off the baseline provided by the imploding economy of a year ago. Some of those cyclical effects may linger into 2022. Longer term, though, rising productivity should keep a lid on inflation, she says.
Ms. Lazar expects the yield on the 10-year U.S. Treasury to rise only gradually from its current level around 1.6 per cent. She says she thinks it will hit 1.7 per cent by the end of this year and top 1.8 per cent next year on its way to an eventual landing spot somewhere between 2 per cent and 3 per cent – “a return to normality,” as she put it.
All of that should come as good news to stock investors. While Ms. Lazar offered no forecast for the S&P 500, the combination of rapid economic growth and the restrained bond yields she foresees should provide fertile conditions for decent returns, especially in sectors that have been overlooked in the stampede over the past couple of years to buy anything tech-related.
To be sure, there are risks, notably the possibility that COVID-19 will prove harder than expected to bring under control. But some of the risks are on the positive side, Ms. Lazar notes.
Consider the international picture, for instance. After Beijing’s decision to throttle back on its growth targets, the U.S. is now contributing more to global growth than China. “But what if China and the U.S. both began to grow rapidly?” she asked.
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