As Summer gets into full swing, financial markets remain quite strong as economies around the world reopen following the lengthy pandemic lockdowns. In the U.S., business activity has been recovering at a rapid pace, aided by a successful rollout of vaccines combined with a substantial, multi-trillion-dollar fiscal stimulus package. Impressively, recent economic data showed first quarter U.S. GDP growing at a robust 6.4% clip, as American consumers emerged from the lockdown with higher-than-normal savings and a pent-up urge to spend.
While the U.S. economic recovery has brought relief to businesses and consumers alike, it has also created new challenges – many of them logistical in nature. For example, supply shortages in important areas such as computer chips have been an ongoing issue, driving up prices of important purchases such as automobiles and home appliances. In a related development, headline inflation readings have been elevated, with the Consumer Price Index (CPI) expected to stay above 3% for at least the remainder of 2021. Knowing that rampant inflation can have negative economic consequences, the Federal Reserve’s response has been to downplay higher prices by categorizing the situation as transitory. Looking ahead, Fed Chair Jerome Powell is forecasting a moderation of inflation towards 2% as business conditions and global trade flows normalize.
Overseas, the economic recovery is underway, although it is not being enjoyed equally on a country-bycountry basis. For example, some European nations have had a slower vaccine rollout and have been hamstrung by smaller EU stimulus packages. In developing countries, most notably India, their recovery from the pandemic has been severely delayed by emerging new variants of the virus.
Despite all the challenges of the past year, stock markets around the world have weathered the pandemic well and achieved new record highs. In the face of adversity, individual companies have once again adjusted and innovated. In fact, many businesses are emerging from the pandemic stronger than before, as evidenced by first quarter earnings results that were 23% above expectations. Looking ahead, we are anticipating more good news as it relates to the fundamentals of the economy, such as continued strong employment data, easing pressure on commodity prices (particularly oil at $74 per barrel), and an eventual victory over COVID. But market expectations are high, leaving both policy makers and corporate executives with little room for error as they plot their strategies for the second half of 2021.