Quarterly Investment Review – Q2 2021

by James Macpherson

Quarterly Investment Review – Q2 2021

Markets continued to move ahead in the second quarter as vaccinations were rolled out, allowing lockdowns to be eased. The vaccination process is most advanced in the US, with Europe a couple of months behind, and the Emerging Markets only really starting their programs now. Nonetheless the stock market recovery of the last year seems incredible against a background where the EU suffered its worst recession since the 1930’s, the world has seen the first rise in poverty for twenty years, and millions of families have seen their prospects and financial situation dashed. The exuberant financial performance has come on the back of the huge double barrelled fiscal and monetary response by governments and central banks, which in turn has led to the question of when these support operations will stop, and whether they will trigger inflation.

The policy response to Covid was extraordinarily aggressive. The fiscal response in the first three months was equal to that of the previous five recessions in the US. US monetary policy produced more QE in six weeks than the total of the 2009-2018 period following the Financial Crisis of 2008. This has led to an abrupt recovery, but more puzzling is this unprecedented stimulus has continued even when the recovery is fully evident. The Fed still buys $40bn of mortgages a month even though there is now a housing shortage. They have said that they are not thinking of reducing their bond purchases of $120bn a month, and do not expect to raise interest rates till 2023 despite the booming economy. The strongest economic recovery since 1945 is being met with the easiest financial conditions on record. At 25% of GDP the recently announced programs of President Biden are greater than Lyndon Johnson’s Great Society programs of the 1960’s. It suggests that the authorities have some doubt as to how well economies would manage if these supports were removed. While the recovery allows the private economy to pick up, there is a big gap to fill. The setbacks and uncertainty caused by the variant strains of Covid also make full unwinding of the lockdowns more complicated. This makes the authorities’ task of judging how and when to withdraw their stimulus much harder.

Will this stimulus translate into higher inflation?

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