economic perspective

April 2021


By Stephen Rich

The financial market’s recovery from its low at the start of the COVID-19 pandemic in the United States in March of 2020 has taken place in two distinct phases. The first phase of the recovery was due to the massive injection of stimulus by the federal government and the rapid monetary response by the U.S. Federal Reserve, which combined to lift stocks off the bottom from a significant decline last March. This recovery was driven by pandemic beneficiaries primarily from the technology and consumer discretionary sectors. After a three-month pause for the market, as uncertainty regarding the election created some portfolio repositioning and profit-taking, the next phase of the bull-market rally began in mid-November. The second phase has been led by stocks from the energy and financial sectors that are beneficiaries of the reopening of the economy and from a steeper yield curve. In general, there has been a broadening and rotation away from growth-orientated areas to more value or cyclical areas of the market. For now, the bullish sentiment from investors remains intact and focused. Mutual of America Capital Management LLC takes a close look at five key areas prompting this sentiment: 1) the momentum connected to the reopening of the economy; 2) the acceleration of COVID-19 vaccinations; 3) the strongest Gross Domestic Product (GDP) growth in four decades; 4) a very accommodative Federal Reserve; and 5) the potential for trillions of dollars in new stimulus earmarked for infrastructure and other projects.

Market Update

Overall, the U.S. equity markets posted further gains in the first quarter of 2021 across all indexes. Large-cap equities as measured by the S&P 500® had a strong March and finished the quarter up 6.2%. The Nasdaq and Russell 1000® Growth Indexes were less robust than last year, but were up 3.0% and 1.0%, respectively. The Russell 2000® Index returned 12.7% in the first quarter and is up 94.8% over the 12 months ending March 31, 2021. This is the second-best return ever during a 12-month period, trailing only the 113% return in 1936. During the quarter, there was a huge rotation into value, as the Russell 1000® Value Index was up 11.2% and outperformed Russell 1000 Growth (1.0%) by 10.2%. As a result, the gap between growth and value stocks over the last year has shrunk to a 6.6% gap between the performance of the Russell 1000 Growth Index (up 62.7%) and the Russell 1000 Value Index (up 56.1%), after reaching a record-high gap of 39.9% in August. The big standout for the first quarter of 2021 and for the 12-month period ending March 31, 2021, was the Russell 2000® Value Index, which clocked returns of 21.2% and 97.0%, respectively. The one-year performance of the Russell 2000 Value Index is its best on record and managed to outperform the Russell 2000® Growth, which returned 90.2% over the same period, by 6.8 percentage points.

The S&P 500 has had an amazing run over the last 24 months, returning 20.5% annually for the period ending March 31, 2021. To put the move in perspective, on April 1, 2021, the S&P 500 crossed the 4,000 level for the first time in history. The move from the 3,000 mark to 4,000 only took 434 trading days, the quickest 1,000-point increase on record. By comparison, the prior 1,000-point move, from 2,000 to 3,000, took 1,227 trading days. The rise in equities is being driven by the strong economic rebound.

While equities continued to rally in the first quarter, the fixed income market tumbled as traders anticipated that a strong economy could ignite higher levels of inflation. The prices of the 10-year Treasury bond and 30-year Treasury bond declined 7.1% and 16.2%, respectively, marking their worst quarter in more than four decades. The 10-year Treasury yield started 2021 at 0.93% and rose by 0.82% to end the quarter at 1.74%. At these levels, the 10-year Treasury is sitting at pre-pandemic levels. The Bloomberg Barclays U.S. Corporate Bond Index and the Bloomberg U.S. Aggregate Index both fell 4.6% and 3.4%, respectively.

The disconnect between the equity market and the bond market is not uncommon in the short run, and most likely, one will be proven right in the end. Either the equity market is right, the economy is reopening and growth will propel the equity market higher; or the bond market is right, and the strength of the economy will lead to higher levels of inflation down the road. As the year progresses, we will continue to monitor the interrelation between the two markets.

Labor Markets Still Lagging

Even with the U.S. nonfarm payrolls increasing by 916,000 in March, and the unemployment rate falling to 6%, the unemployment picture still looks bleak by three different measures. First, net payrolls are still off by 8.4 million relative to February 2020 levels. Some 22.4 million jobs were lost between March 2020 and April 2020, and since then, 14 million have been gained back. Second, household survey data indicates that 9.7 million people remain unemployed. Third, if the total number of people receiving pandemic unemployment assistance and pandemic emergency unemployment compensation is included, the total number of claims for some form of relief fell from a peak of 33.6 million to 18.2 million. That represents a significant decline, but is still a huge number, indicating that more needs to be done to get back to pre-pandemic employment levels.* Further adding to the complete employment picture is the JOLTS (Job Openings and Labor Turnover Survey) report, which showed 7.4 million job openings in February. Job openings increased by a combined 615,000 in January and February, the largest two-month gain for this series going back to 2000. The conundrum that has developed among experts is whether or not people will be disincentivized to give up the generous unemployment benefits and seek a job that might provide less money.

Strongest GDP in Four Decades

The U.S. economy is poised to return to pre-COVID-19 levels as soon as the second quarter of this year. The U.S. government has authorized over $5 trillion in fiscal stimulus since March 2020, including the $1.9 trillion approved on March 11, 2021. The $5 trillion easily surpasses the $830 billion Recovery Act that was implemented after the Great Recession of 2007–09. The $1.9 trillion package alone is anticipated to add an additional 3% to GDP in 2021. Additionally, consumers have stockpiled nearly $2 trillion in savings since the start of the pandemic and have experienced the wealth effect of rising equity and real estate markets. This highly stimulative fiscal policy, coupled with consumers’ ability and desire to spend, has the potential to boost GDP in 2021 to the fastest pace in nearly four decades. Bloomberg Economics predicts that GDP could hit 7.7% by year-end, with the second and third quarters coming in at a robust 11% and 10%, respectively. The last time the economy grew at a similar pace was the first year after the 1981–82 recession, when growth accelerated at 7.9% in 1983.

Housing, Retail Sales and ISM

Data from housing and retail sales, as well as from the Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), all confirm that the economy is beginning to pick up. U.S. housing starts rebounded sharply in March after a brief pause due to winter storms. In March, residential starts jumped 19.4%, to 1.74 million, their highest level since 2006. The Fed’s stance on keeping rates low until 2023 should help keep mortgage rates low and support continued housing strength. In March, retail sales—which measure sales at stores, restaurants and online purchases—rose 9.8% from the prior month as the new round of stimulus checks delivered to consumers fueled purchases. In February, the retail sales number declined by 3.0% as inclement weather affected most of the country. The ISM nonmanufacturing survey hit an all-time high, rising from 55.2 to 63.7 in March. There was broad strength, with all 18 industries reporting strong growth. These are all very positive signs that a strengthening economy is beginning to gain traction.

Equity Valuations Better with Earnings-Per-Share Growth

Consensus earnings growth for the S&P 500 is 24.5% for 2021 and 15.2% for 2022. With this anticipated growth, the forward price-to-earnings multiple on next year’s earnings is roughly 22 times. Valuations still seem stretched relative to historic forward price-to-earnings multiples, which are generally 15 to 18 times. For the time being, the Fed has calmed the equity market by reassuring that Fed Funds target rates would remain at zero through 2023 and the Fed would continue to make $120 billion in monthly bond purchases.

Speculative signs have begun to emerge in the equity markets. The unprecedented fundraising by financiers, politicians, athletes and celebrities in Special Purpose Acquisition Companies (SPACs) is one sign. Since the beginning of 2020, about 600 of these “blank-check” companies have raised more than $182 billion with the intent of acquiring existing private companies. Another notable sign is the extreme volatility in “meme” stocks, such as GameStop, the electronics retail company whose stock returned 907.5% in the first quarter after a skirmish between hedge fund companies and small investors over the direction of the stock price. And finally, there is the massive rally in the cryptocurrency Bitcoin, which has returned 771% since the beginning of 2020.


The U.S. economy continues to recover from the massive dislocation brought on by the COVID-19 pandemic. Given that there has been a significant degree of fiscal policy support, and evidence of consumers’ ability to spend, economists have upwardly revised their growth estimates for the U.S. economy from 4.0% in 2021 to a range of 6%–8% for the year. Indicators such as housing, retail sales and ISM data are very strong, and all point to a firming of the U.S. economy. Additional support continues from the Federal Reserve, which appears to be staying on the sidelines with any interest rate increase until inflation and employment goals are satisfied. Areas of concern continue to exist due to high levels of unemployment, a spike in long-term interest rates due to concerns about mounting inflation and speculation in the stock market creating heightened valuations. On the political front, President Biden has turned his focus to a four-part, eight-year, $2.25 trillion infrastructure stimulus. However, unlike the previous stimulus packages since last March, this one is projected to be paid in part by an increase in the corporate tax rate from 21% to 28%. We are optimistic that the economy will continue to show improvement over the course of this year. As the economy heals in 2021, we would continue to favor value-oriented stocks, which should benefit from the reopening of the U.S. economy.

Stephen Rich is the Chairman and CEO of Mutual of America Capital Management LLC.

* Bureau of Labor Stastics

Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company. Securities offered by Mutual of America Securities LLC, Member FINRA/SIPC. Insurance products are issued by Mutual of America Life Insurance Company.

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