A mountain of economic data and corporate earnings this past week confirm what we’ve been saying for some time: While COVID-19 is still impacting some industries, the bulk of the U.S. economy has adapted and is on solid footing. Congress pushed forward with President Biden’s proposed $1.9 trillion economic stimulus program on Friday, which should help both businesses and consumers bridge the gap until this summer. That’s when wider vaccine distribution should allow for more areas of the country to sustainably reopen.

In the meantime, a rebounding economy often carries along increasing prices. As a result, we’re likely going to start to hear more talk about rising future inflation. We’ve seen some initial signs of that in the data; first with rising long-term interest rates at the beginning of 2021 and in the reported prices being paid to restock lean business inventory levels. However, we continue to believe that prices are growing at reasonable levels compared to underlying economic growth. We think there’s still time before we see the kind of sustained inflation that could lead to tighter monetary policy.

Following the worst week for U.S. stocks since October last year, over the past week investors recouped all of the losses and more. Large-cap U.S. stocks have shed their leadership role in the early days of 2021, as investors rotated into out-of-favor asset classes — such as small and mid-sized companies, emerging markets and commodities.

The recent ebbing and flowing in financial markets serve as a reminder that having a balanced portfolio and long-term investment strategy can help boost returns and reduce volatility.

WALL STREET WRAP

ISM Confirms Broader U.S. Growth: The Institute for Supply Management (ISM) posted its January Manufacturing purchasing manager’s index on Monday, which we view as the best real-time barometer of the U.S. economy each month. The headline number of 58.7 was down from December but still a solid result (readings of 50 and higher signify economic expansion).

When you peel back the layers, the data look even stronger. Sixteen of 18 sectors reported growth last month, which validates our outlook for a broadening of the U.S. economic recovery in 2021. Additionally, new orders came in at 61.1, while customer inventories were just 33.1, the lowest level since 2009, when the country was emerging from the Great Recession. We see the combination of rising orders and lower inventory as a key harbinger for future economic expansion.

The ISM’s Services report on Wednesday was particularly robust. Also coming in at 58.7, this reading was the best figure in nearly two years. Similar to Manufacturing, there’s a wide spread between new orders (61.8) and inventory sentiment (49.7) in the Services area, signaling a continued economic recovery. Most notably, this is just the fourth time in nearly 24 years of data that inventory sentiment has fallen below the key 50 mark.

The Employment component on the Services side was also the strongest since the COVID-19 pandemic began. The data showed that jobs are coming back even in the accommodation and food service sectors, which have been hit particularly hard over the past year.

The robust ISM numbers did not occur without a jump in prices paid, both in the Manufacturing and Services readings. This is certain to have caught the attention of some inflation hawks, although Fed Chairman Powell has consistently signaled a willingness to tolerate higher prices for the next couple of years as the economy recovers.

Earnings Post Surprise Q4 Growth: Another remarkable measure of the breadth of the economic recovery came in the form of U.S. corporate earnings. According to data compiled by Bloomberg, 58 percent of companies in the S&P 500 have reported results for the fourth quarter of 2020, with aggregate profit currently showing 6.8 percent growth.

What’s impressive about that figure is that expectations at the beginning of the year were for a 9 percent earnings decline — the difference being that 81 percent of S&P 500 firms have surpassed expectations by an aggregate 19.1 percent.

Looking ahead to 2021, Refinitiv suggests that aggregate U.S. profit will grow 23.5 percent from the previous year. This includes increases in all 11 sectors of the S&P 500 (up from just 6 in the fourth quarter of 2020), led by energy, industrials and consumer discretionary.

Democrats Push Forward Stimulus Plan: Senate Democrats exerted their slim majority to advance discussions about President Biden’s proposed $1.9 trillion stimulus plan on Friday. The tally was split evenly along party lines, meaning that Vice President Harris cast the deciding vote to send the budget bill to the House of Representatives — where it was also approved.

Biden’s plan has met pushback from Republicans, particularly in new areas, including funding for state and local governments and a higher federal minimum wage. With a majority in both houses of Congress, Democrats appear to have control over the negotiations, although the final bill is still far from being decided upon.

Politics aside, the positive near-term effect of injecting capital into the economy right now likely outweighs eventual inflation concerns down the road.

THE WEEK AHEAD

Consumer Prices on the Rise? On Wednesday, the Bureau of Labor will post the Consumer Price Index (CPI) for January. Given the increases we saw in the Prices Paid component of the ISM report last week, we’ll be looking for confirmation of whether inflation is truly ticking higher. At last check, CPI was running at 1.4 percent annual growth (1.6 percent excluding food and energy), both of which are comfortably below the Federal Reserve’s target of 2 percent.

University of Michigan Offers Early February Read: Speaking of consumers, the University of Michigan’s preliminary Consumer Sentiment report on Friday offers one of the first key pieces of economic data for February. It will be interesting to see if recent $600 individual stimulus payments — and the prospect of an additional $1,400 — will factor into this reading, which has exhibited a sharp partisan skew in recent months.

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