2021 is shaping up to be a year of strong economic growth, and, right now, the indicators are looking good for financial markets as well.
- The government response to the COVID shutdowns was swift and big. In total, the federal government is spending $272 billion, equivalent to 14% of GDP, and the states $122 billion. All that newly created money has to go nowhere.
- Early on, households saved a lot of the extra cash. The June quarter savings rate hit 19.8%, 8x higher than the year before and only 0.5% below the 60-year peak set in 1974. The Commonwealth Bank estimates households will have about $100 billion of savings, or 5% of GDP, that has been accrued between the start of COVID and December.
- To that you can add $34 billion of super withdrawals so far, with Treasury estimating an eventual total of $44 billion.
- After a record plunge to 76 in April, consumer confidence has now had 11 consecutive weekly gains to 108.
- It now appears Australians are spending those gains. Commonwealth Bank reported credit card spending jumped 11% year on year in mid-November. Restaurants in New South Wales enjoyed seated dining numbers 55% higher than a year ago, while Queensland was a whopping 79% and even shellshocked Victoria was up 54%
- Retailers have seen record spending in the Black Friday sales, prompting Gerry Harvey to say, “This is like the greatest boom I’ve ever seen in my lifetime”.
- The US fiscal package injected 13% of GDP and pushed the personal savings rate to almost double what it was at the start of the year.
- Low interest rates have ignited the US housing market, where prices are now 10% above the pre-GFC levels. Homeowners’ equity is at a record high and the increase in the pending sales index is parabolic.
- More than 80% of stocks in the S&P 500 are trading above their 200-day moving average, a sign of positive market breadth that has only been seen twice in the past 20 years.
- We are seeing 52-week highs in share markets across the world, from China, to Japan, to Europe, to Australia.
- Global equities have seen a record inflow post the COVID vaccine announcements.
While the indicators are stacking up well, there are, of course, no guarantees that markets will play ball and they sure do have a way of wrong-footing us. However, it’s noteworthy that nothing in the economy was ‘broken’ going into the pandemic downturn; there was no particular sector on the cusp of being crushed by excessive debt and while valuations were not cheap, they were certainly defensible.
Now is not the time to be sitting on lots of cash.