4Q20 real GDP grew at a 4.0% q/q seasonally adjusted annual rate, with increases in consumption, housing, business fixed investment, inventories and exports, partially offset by declines in government spending and increasing imports (a subtraction from real GDP). Still, economic output remains 2.5% below peak 4Q19 real GDP. However, additional fiscal stimulus should support growth going forward. Personal income rose 0.6% m/m in December with the disbursement of parts of the fiscal package, which may lead to stronger consumption going forward, as it fell 0.2% m/m in December.
Nonfarm payrolls decreased by 140,000 in December, the first decline since April 2020. Job losses were concentrated in leisure and hospitality, although manufacturing and construction partially offset this, reflecting the stronger recovery in goods over services. The unemployment rate remained at 6.7%. Wages grew 0.8% m/m for all workers and for production and non-supervisory workers, up 5.1% and 5.2% y/y, respectively, partly a compositional effect reflecting the loss of lower-wage jobs. Although the labor market is likely to struggle this winter due to the pandemic, the broader distribution of vaccines should lead to a sharp rebound in employment in late 2021.
The 4Q20 earnings season kicked off with 184 companies having reported (49.9% of market cap). Our current estimate for 4Q20 earnings is $37.93 with EPS declining 3.2% y/y. Thus far, 84% of companies have beaten on EPS estimates, and 70% have beaten on revenue estimates. Further economic recovery, positive vaccine developments and a weaker dollar (-6% y/y) should help 4Q earnings, but lower oil prices (-30% y/y) will be a headwind. Earnings should continue to grow in technology and health care, while financials, energy, industrials and consumer discretionary are expected to contract.
December headline PCE rose 0.4% m/m and core PCE rose 0.3% m/m, driven by a rise in energy. The indices were up 1.3% and 1.5% y/y, respectively. Headline CPI rose 0.4% m/m and core CPI rose 0.1% m/m in December, rising 1.3% and 1.6% y/y, respectively. More than 60% of the overall increase was driven by an 8.4% increase in gasoline. Lower energy prices and slack in the economy continue to keep inflation pressures in check.
The FOMC maintained the federal funds target rate in a range of 0.00%–0.25%, and the policy rate is expected to remain low through 2023. The committee will also maintain its current pace of asset purchases of at least $80bn in Treasuries and $40bn in agency mortgage-backed securities per month until the committee feels “substantial further progress” has been made toward its inflation and employment goals. Chair Powell noted in his press conference there would be plenty of forward guidance before the committee begins to taper its asset purchases.
- The U.S. recession and recovery could be at a slower pace than markets are anticipating.
- Political headlines could foment market volatility.
- Inflation could spike in the medium term.
- Quality with a dash of cyclicality should be a focus for U.S. equity investors.
- Fixed income investors should move up in quality, and look to core bonds for portfolio ballast.
- Long-term growth prospects and cheap absolute and relative valuations support international equities.
Originally Posted on February 1, 2021
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