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  • Chip Barnett

After the Sugar Rush

July 2021

Everyone is breathing more easily this summer. We’re eating out again, thinking about the shows we want to go see, and having people over. It’s intangible, but being in a better mood is good for the economy. (However our cabin fever on airplanes is so bad they won’t serve alcohol. C’mon, America).

Stocks show it, too, up about 14% year to date. The proposed Biden policies are no longer a surprise, and international dynamics feel unremarkable. We have issues to solve, but let’s enjoy what we’ve done to get this far.

Beneath the surface, there are a few wonky but important moving pieces.

Interest rates

As they should be, the Fed is discussing right now how to gradually tighten monetary policy. Jay Powell doesn’t want his legacy to be how he let inflation get away. Just in the past few weeks, the Fed has begun signaling they’re going to tighten policy in a year, sooner than their previous guidance. Did investors freak out, sell bonds and push rates higher? No. They did the opposite: buying bonds and driving rates lower. While most investors think inflation is coming and rates will ultimately move higher, some see this move lower in rates as a sign a big economic slowdown is coming.

A slowdown would be big news, so let me explain. Look at this chart. This is total government payments to U.S. citizens. In a normal year, the government transfers about $2 trillion to U.S. individuals. In 2020 it was about $5 trillion.

This is like the Halloween of sugar rushes for the economy. For the most part, it’s worked. Assuming the government normalizes our diets from that $5 trillion back to around $3 trillion in 2021 and 2022, that $2 trillion less is going to be a drag on our $21 trillion GDP. Yet because of - or in spite of that sugar rush - the economy is supposed to grow about 7% this year. So you can see how, with big stimulus and big growth, economic estimates can move around a lot, confusing stock and bond markets.

Covid variants

The Delta variant is becoming the dominant strain of Covid as I write. America is doing better than most other countries in its rate of vaccination. I don’t worry that this variant is going to lead to closing the American economy down again, masking up again, etc., because early research shows that our vaccines do a good job of fending off the variants. Of course future variants could be trickier. My concern is for the rest of the world that isn’t as vaccinated as America. If the Delta variant leads to rising global symptoms and hospitalizations, the global supply chain will stay constrained and the economy will grow by far less than its potential. That’s econbabble, I know. But stock prices reflect a lot of optimism, and if that optimism gets a dose of reality, stocks will come down in a hurry.

There are always risks. Economies are cyclical and I think last year’s recession in hindsight will prove to have been a healthy reset. We’ll see some volatility in stocks this summer as we figure out growth rates and the Fed figures out its signaling on rates. Still, I expect to continue the seasonal pattern of a good second half of the year for stocks.


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