economic perspective

June 2021


By Stephen Rich

The financial market's recovery since March of 2020 has occurred in three distinct phases. The first was the "virtual" phase, where the U.S. economy came to a standstill as Americans were asked to shelter in place at the onset of the coronavirus pandemic. As a result, businesses that provide products and services for stay-at-home and remote parts of the economy were the beneficiaries. Coupled with low interest rates, growth sectors such as technology and consumer discretionary were the stand-out performers. The second phase was the anticipation of the reopening of the "real" economy, with the catalyst being Pfizer's announcement of encouraging trial results for its COVID-19 vaccine on November 9, 2020. This gave investors hope that restrictions on businesses and consumers would be lifted and that impaired businesses might soon restart. Along with the anticipation of a rebounding economy, there was concern that the threat of higher levels of inflation could rapidly lead to higher interest rates. The equity markets quickly rotated and rewarded the value sectors of the market, such as energy and financials, which lagged during the first phase. The third phase is the current "reality" phase, which prompts the question: "Where do we go from here?" Currently, certain fundamentals of the economy need to be aligned with growth and inflation expectations.

As the country moves through this third phase of the economy, Mutual of America Capital Management LLC will continue to monitor: 1) the strength of the gross domestic product (GDP); 2) unemployment levels and job openings; 3) inflation expectations as measured by the consumer price index (CPI); 4) the potential for trillions of dollars in new spending for infrastructure and other programs; and 5) valuation levels in the equity market.

Equity Markets Continue Gains

Overall, the U.S. equity markets continued to post further gains in the first five months of 2021 across all indexes. Large-cap equities as measured by the S&P 500® Index are up 12.6%, with every month except January positively contributing. The Nasdaq and Russell 1000® Growth Indexes were less robust than last year, but were up 7.0% and 6.3%, respectively. The Russell 2000 Index returned 15.3% in the first five months and is up 62.5% over the 12 months ending May 31, 2021. During the year-to-date period, there was a significant rotation into value—the Russell 1000 Value Index was up 18.4% and outperformed Russell 1000 Growth (6.3%) by 12.1%. As a result, value stocks now lead growth stocks over the 12-month period, as of May 31, 2021, by 4.4%. It’s worth noting that on August 31, 2020, the gap between the performance of the Russell 1000 Growth Index and the Russell 1000 Value Index reached a record high of 39.9% in favor of growth. The big standout for the year-to-date period, and for the 12-month period ending May 31, 2021, was the Russell 2000 Value Index, which clocked returns of 27.5% and 79.3%, respectively.

While equities continued to rally after the first quarter, the fixed income market traded in a tight range, pivoting around 1.6% for weeks after reaching a more than one-year high of 1.77% in March. Overall, the prices of the 10-year Treasury bond and 30-year Treasury bond have modestly improved since March 31, 2021, but are still down 5.5% and 13.3%, respectively, as traders anticipated that a strong economy could ignite higher levels of inflation. The 10-year Treasury yield started 2021 at 0.93% and rose by 69 basis points to end May at 1.62%. At this point, the 10-year Treasury is still at pre-pandemic levels. In the year-to-date period ending May 31, 2021, the Bloomberg Barclays U.S. Corporate Bond Index and the Bloomberg U.S. Aggregate Index fell 2.9% and 2.3%, 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. The debate around inflation has intensified in recent months, mainly between two views. Some argue that current price increases are temporarily being driven by anomalies created by the pandemic, such as supply-chain bottlenecks and a surge in spending as economies reopen. Others think inflation is not transitory as a result of the massive and continued stimulus being applied to the economy. The headline measure of consumer prices (CPI) rose at an annual rate of 4.2% in April and 5.0% in May, the largest annual gain since August 2008. Recently, Federal Reserve officials have given mixed messages about the need to dial back monetary stimulus, perhaps to prepare the markets for an eventual exit or tapering. While no policy change is expected at the Fed’s next meeting on June 15–16, traders are beginning to speculate whether a policy shift could occur at the Fed’s annual meeting in Jackson Hole, Wyoming in August. This meeting has served as a venue in the past for important policy signals. For now, the stated policy is to keep rates low through at least 2023.

Labor Markets Still Lagging

Even with U.S. nonfarm payrolls increasing by 559,000 in May and the unemployment rate falling to 5.8%, the unemployment picture still looks bleak by three different measures. First, net payrolls are still off by 7.6 million, relative to February 2020 levels. Some 22.4 million jobs were lost between March 2020 and April 2020, and since then, 14.8 million have been gained back. Second, household survey data indicates that 9.3 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 15.4 million. That represents a significant decline, but it 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 movement going in the wrong direction, with 7.4 million job openings in February, 8.1 million in March and 9.3 million in April. A debate has developed among experts over whether people will be disincentivized to give up the generous unemployment benefits and seek a job that might provide less money.

With that in mind, following is a summary of federal and state unemployment benefits. Currently, unemployed individuals are receiving an extra $300 a week in federal benefits through Labor Day. That’s on top of the state unemployment benefits averaging $320 per week. On average, combined federal and state unemployment benefits are $638 per week. In 2019, this combined amount averaged $348 per week. The unemployment payments work out to $15.95 an hour, based on a 40-hour work week, which is more than double the federal minimum wage of $7.25 an hour. According to economists at Bank of America, the combined unemployment benefits result in anyone earning less than $32,000 a year potentially receiving more income from unemployment compensation than from their previous jobs.

Strongest GDP in Four Decades

The U.S. economy is poised to return to pre-COVID-19 levels during the second quarter of 2021. The U.S. government has authorized more than $6 trillion in fiscal stimulus since March 2020, including the $1.9 trillion approved on March 11, 2021. The $6 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 its highest level in nearly four decades. The current consensus GDP estimate stands at 6.6% for 2021, with ranges from 6.0% to 8.0%. 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%.

Housing, New Vehicle Sales and ISM

Data from housing and new vehicle 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 April reading fell slightly, to 1.57 million units. The Fed’s stance on keeping rates low until 2023 should help keep mortgage rates low and support continued housing strength. As for new vehicle sales, these continue to grow, with May’s numbers rising to 17.0 million annual units. Last April, new car sales bottomed at 8.5 million units. The ISM nonmanufacturing survey hit an all-time high, rising to 64.0 in May. These are all very positive signs that a strengthening economy is beginning to gain traction.


The price of commodities is being driven higher by a combination of tariffs, decreased production during the COVID-19 pandemic and unanticipated demand for housing. While investors debate the impact of inflation and rising rates on financial markets, the prices of select commodities, including lumber, copper, steel and gypsum (the main component of drywall), have surged amidst low levels of housing inventory and incredibly strong demand for new construction. On average, today’s higher lumber prices add almost $36,000 to the cost of a new single-family house, according to the National Association of Home Builders. The table below shows the performance returns of a select group of commodities.

Equity Valuations Better with Earnings-Per-Share Growth

Consensus earnings growth for the S&P 500 is 35.0% for 2021 and 11.5% 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 per-to-earnings multiples, which are generally 15 to 18 times. For the time being, the Fed has calmed the equity markets by affirming that Fed Funds target rates would remain at zero through 2023 and that the Fed would continue to make $120 billion in monthly bond purchases until it has made substantial further progress toward its employment and price goals.

Speculative signs have begun to emerge in the equity markets. Another notable sign is the extreme volatility in "meme" stocks, such as AMC Entertainment Holdings. The movie theater company’s stock returned 1,132% in the year-to-date period ending May 31, 2021, after a skirmish between hedge fund companies and small investors over the direction of the stock price. Evercore ISI conducted a poll with clients that was released on May 28, 2021, measuring how confident they were that the next 10% move in the equity markets would be up. Clients’ confidence stood at 51%, down from 66% in December.


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, vehicle 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 no interest rate increase until inflation and employment goals are satisfied. Areas of concern continue to exist due to high levels of unemployment, mounting inflation as measured by the consumer price index (CPI) and speculation in the stock market creating heightened valuations.

On the political front, President Biden unveiled a detailed budget proposal that would spend $6 trillion next year and run a deficit of $1.8 trillion. The budget incorporates the administration’s multiyear initiatives, such as $1.8 trillion for the American Families Plan and $2.3 trillion for the American Jobs Plan, the latter of which focuses on infrastructure. However, unlike previous stimulus packages, like the one last March, these costs would be paid for by increased taxes on corporations and high-income individuals.

We are optimistic that the economy will continue to show improvement over 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.

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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