- Easy financial conditions, generous government spending, and lofty markets appear to be providing the setup for strong growth.
- Policymakers are staying the course, seeking broad benefits from a vigorous expansion.
- Investors remain sanguine despite expectations for growth and inflation that are well above trend.
Setup for strongest economic growth in 35 years
Easy financial conditions, generous government spending, and strong markets have left consumers - and companies - feeling flush. We believe this provides the setup for the strongest economic growth in over 35 years.
Investors saw solid returns across asset classes in the quarter, despite concerns about valuations. Positioning reflected confidence in sustained, above-trend growth and stable expectations for long-term rates and inflation. So far this year, investors are flocking to commodities, Real Estate Investment Trusts (REITs), and other beneficiaries of a strong recovery. Both fixed income and equities continue to draw inflows, and retail interest in stocks is close to a 10-year peak according to TD Ameritrade.1 Major U.S. stock indices closed at or near all-time highs, with the S&P 500 closing at a new record. With a year-to-date total return through second quarter of over 15%, investors already have booked what’s normally considered a more-than-respectable full year gain. A reprieve in rates along with tighter spreads moved fixed income back into the positive column for the quarter. Credit spreads continued their march downward as investors searched for yield which proved to be elusive. Non-investment grade credit ended the quarter at an all-time low yield of 3.75%.
The economy rebounded as consumers returned and companies invested for expected demand. Growth may reach double digits for the quarter with current consensus for annualized Q2 growth at 10%. This would build on the strong 6.4% rate of expansion in Q1 and is reflected in consensus growth of more than 6% and 4% for this year and next.2 Optimism is evident in both consumer and corporate data. The Business Roundtable’s CEO Economic Outlook Survey, reflecting 15 years of data, showed a near record outlook and the strongest hiring plans in the time series.