Globally, economies have been impacted by the pandemic and the most important questions that need to be addressed are how big is the damage and the way forward?
By Yogesh Patil
Globally, economies have been impacted by the pandemic and the most important questions that need to be addressed are how big is the damage and the way forward? The unknowns will reveal themselves only post-recovery really gets underway however, one can assume that the damage to the US economy has been significant and the economy will take sufficient time to be back to normalcy. Even after the third quarter’s rapid growth, GDP remains 3.5% below its peak in 2020 Q4. The good news about the vaccine, coupled with Fed’s quantitative easing policies and government’s stimulus packages, have lowered the probability of a long slog scenario.
The crisis has remained more of a health crisis than a financial one as US households are sitting on considerable savings and the relief bills have kept demand growing. Fed has avoided significant dent to the US economy by keeping the financial system operational even during the pandemic. Banks are well-capitalized, and many companies have been able to borrow at relatively lower rates and easy terms. Large companies too remained operational, but business investments are still muted.
The optimism regarding greater certainty of government policies after the election of US President, Joe Biden, is likely to raise investors’ confidence. Trade tensions and tariffs are likely to be reduced or be removed. Vast scale of unemployment, with the number of unemployed growing quickly, needs to be brought back to normal as long-term unemployment is associated with a number of bad outcomes including lower demand.
One of the biggest threats to macroeconomic recovery is inflation. There is a probability that inflation shall come back with a vengeance. Inflation could very well reach or surpass the Federal Reserve’s 2% target in a few months. Surging commodity and oil prices combined with a weak dollar shall push inflation in the US upwards. The disruptions in supply chains and re-engineering of the same may further push inflation to the north. Above that, US relief packages have ballooned the government’s budget deficit. If 10-year yields surge, equity valuations could come under pressure, which in turn may hurt assets classes.
Risk and reward continue to be high in technology stocks. COVID-19 is a boon for technology players as it has forced exponential use of apps and platforms, right from online shopping to learning to telemedicine. Each of these companies have captured a core human need and continue to be viewed as having reliably strong earnings growth, relatively safe free cash flow production and management teams that are willing to invest today for the long-term.
US Market is being buoyed by optimism that the economy will be helped by a major stimulus package proposed by President Joe Biden, the rollout of Covid vaccines and easy Federal Reserve policy. The focus will be to jump-start the economy and ensure strong growth momentum. Weakening of dollar’s value vs other currencies will be a key monitorable. The battle between supply and demand will likely continue in the near term and the coming months will show the extent and direction of the US economic recovery.
(Yogesh Patil is a Fund Manager – Equity at LIC Mutual Fund. The views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to the author’s employer and Financial Express Online. Please consult your financial advisor before investing.)