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Economic Outlook

By: Russ Colbert
Spring 2021 (Vol. 39, No. 1)

The combination of a very loose monetary policy, the federal government sending out check likes there is no tomorrow, and continued roll-out of the Covid-19 vaccines and you will then receive some very strong economic data. The problem is that this rapid growth is not going to last forever. Look for the economy to slow in the future. It may not be this year, most likely sometime next year. Businesses will continue to improve, and the U.S. should continue to see strong productivity gains in business as it continues to open back up. GDP for the first quarter of 2021 came in around 6.4%. This is very good, many of the economic forecasters believe it will continue throughout the rest of the year. The extremely low interest rate environment should also continue to help the U.S. economy keep growing the rest of the year.

The low interest rates have been great for the housing market. Housing prices have continued to rise over the past year. Many states have lost large numbers of their people to other states during the Covid-19 shutdown. Most of the people are relocating because these states have not reopened for business, as well as they need jobs, and want opened schools their children to attend. The Covid-19 problem continues to cause people moving out of their states to states opened for business. This is now causing a problem in some states that are gaining people to have a much smaller inventory of homes for sale. It is also pushing home prices up. Single-family existing home inventories are at rock bottom levels and home prices will continue to rise.

Going forward the stock market will continue to perform well as states open back up for business and the economy continues to recover. There are two main concerns going forward. First, we know President Biden wants an increase in taxes, but how much of an increase we will see, and how soon could it happen. The second area of concern would be an increase in interest rates due to concerns of rising inflation. Currently, we think it would be very hard to get 50 Senate votes for a whole new federal tax overhaul. So far there are some Senators holding back, maybe because of the 2022 election. If taxes go up, we are hoping for a modest increase in taxes instead of a large increase. The stock market would more likely accept a modest increase in taxes causing a more positive effect on corporate earnings, leaving some room for the economy to grow and the stock market to continue to move up.

The stock markets will not move in a straight line, and corrections are always a possibility, as the states open up, and the economy continues to improve. Some of the sectors that fell behind over the past year due to shutdowns and limited global trade should begin to show strength and opportunity. The Federal Reserve will continue to accommodate with low interest rates for awhile. There are also trillions of dollars of cash on the sidelines waiting for an opportunity to invest. The vaccines have now reached over 50% of Americans and the economy continues to expand rapidly. The stock market still looks good and currently we are positive on buying during the pull backs.

Tax rates are most likely going up. We are not sure how much and when exactly it will happen. At this point we think it would hard to get enough votes in the Senate to pass many of the new tax proposals. We believe the tax hike will most likely be implemented on January 1, 2022 if passed. That is not etched in stone, so we will have to see how things play out in Washington the rest of this year.

If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.

Russ Colbert
Senior Portfolio Manager

Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.