If you had spent the past year living in a cave, or perhaps the metaverse, and emerged to read today’s headlines, you could be forgiven thinking you had not missed much. The headlines are dominated by Covid infections, President Biden’s infrastructure plan, and the threat of high inflation, much as they were at the start of 2021.
The sense of déjà vu around Covid is crushing. I am once again on tenterhooks waiting to see if I can get to Italy for Christmas (Covid is currently beating me 4-1 on holidays). As case numbers rise vertically, so too are the chances of further restrictions and the knock-on effects that they would have on consumption and supply chains.
This time last year, however, the market looked through the dire Covid situation, buoyed by the prospect of the vaccine rollout. With the stock market 25% higher today there is perhaps less room for reopening exuberance. Nevertheless, booster vaccinations and evidence from South Africa hold out the hope that this wave will be short-lived. And if this strain proves to be less virulent it could herald the end of the pandemic (although we have heard that one before).
Last December President-elect Biden’s priorities were to pass his Covid relief package, followed by his Infrastructure Plan. The $1.9 trillion Covid relief bill included stimulus cheques and child tax credits but took three months to pass the senate with no support from Republicans.
His Infrastructure Plan, aspiring to Roosevelt’s post-depression New Deal, has taken even longer. While the $1.2 trillion “hard” infrastructure element covering bridges, roads, broadband, etc., passed in November, the second $1.5 trillion “human” infrastructure bill has hit the buffers in the form of Democrat senator Joe Manchin. Without the support of all 50 Democrat senators, the various social care and climate change policies in the Build Back Better Act will not pass into law. Nevertheless, some sort of deal seems possible and will provide the US economy with a third bout of fiscal stimulus next year.
Inflation was not labelled “transitory” by the US Federal Reserve until April, but markets were worried about it from January with bond yields rising sharply. Eight months later and inflation in the US has hit a 30-year high at 6.8%. In response, the Federal Reserve has sped up the end of its QE programme and retired the use of the word “transitory”. Also, the Bank of England surprisingly raised rates in December, suggesting they see the threat of inflation as greater than that of Omicron. Inflation remains a risk for next year, but it should moderate as this year’s steep price increases are factored in, and at least central banks appear willing to act to curb it, albeit belatedly.
There are of course other risks for markets, not least confrontation with Russia and Turkey’s novel approach to monetary policy. But while global GDP growth is expected to normalize, at 4.3% it will not be normal. With that backdrop, there remains plenty to be optimistic about.