Impact of Pandemic Continues to Subside; No Recession in Sight

MINNEAPOLIS (July 7, 2021) – In its 2021 Midyear Outlook, RBC Wealth Management – U.S. expects continued economic improvement leading into the second half of 2021, projecting the impact of the pandemic will continue to subside over the remainder of 2021 and through 2022, resulting in a broadly positive outlook for the U.S. and global economies, particularly equities markets. Though a correction is possible, indicators signal no recession risks on the horizon but rather robust growth in 2021 followed by less-buoyant, above-average growth in 2022.

“Nothing has transpired in the past six months to fundamentally change our optimistic outlook for the remainder of 2021 or for 2022,” said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management – U.S. “The rising tide of GDP and earnings should permit broad market indexes to advance further from today’s levels. As such, we maintain a definitively bright forecast.”

Equities Continue to Remain Robust

The S&P 500 surged 90% from March 2020 during the pandemic lows through June 2021, posting the strongest post-trough rally of all recovery periods that took place during similar frames over the past six decades. While the equity market’s “easy gains” are likely behind us and there are uncertainties ahead in upcoming data that could create volatility or pullbacks, RBC Wealth Management expects that will not hinder worthwhile gains over the next six to 12 months.

“We think the upcoming Q2 2021 earnings reporting season will represent ‘peak growth,’” said Bogdanova. “But by no means do we think it will mark the peak absolute level of the S&P 500 earnings – profits should march higher over the next year, at least. We would continue to hold modestly overweight positions in U.S. equities.”

Led by China and the U.S., all major economies are expected to post significantly above-average GDP growth this year compared to last year’s sharp COVID-19-related declines. Barring an aggressive return of the pandemic, momentum driven by repeated applications of governments’ fiscal stimulus and supported by entrenched accommodative monetary policies should ensure most economies power through 2022 and potentially beyond.

Safe from Recession, Room for Correction

RBC Wealth Management’s U.S. recession scorecard, which tracks six leading indicators, suggests that an early recession warning is nowhere in the immediate vicinity. RBC Wealth Management strategists anticipate the year-over-year nominal GDP growth rate of the U.S. economy, marked at 2.7% as of Q1, is rising sharply and should reach the realm of 9% by year end, slowing to 6% by the end of 2022.

“The next recession, when it eventually arrives, will likely be triggered the good old-fashioned way; a tightening of credit conditions sufficient to make interest rates prohibitively expensive and banks more cautious about lending,” says Bogdanova. “No tightening of that magnitude appears on the horizon.”

However, the possibility of an equity market correction does lie ahead, and many investors are concerned about inflation, the pandemic, and geopolitics, among other correction-inducing conditions. Yet several factors – including successful global vaccine rollouts and reopening economies, healthy corporate earnings, corporate credit accessibility, as well as strong capital spending – argue against the likelihood of correction.

Fixed Income – Fed Adds to Volatility in the Markets

The prospect of the Federal Reserve tightening its monetary policy has now swung back into the market’s observable landscape, reintroducing fixed income market volatility and raising concerns about central bank support for the global economic recovery. As global vaccination rates and economic trajectories continue to differ, central banks have begun to chart different pathways forward.

As of its June meeting, the Federal Reserve looks to be slowing its support of $120 billion per month in Treasury and mortgage bond purchases, and has signaled the potential for two rate hikes in 2023.

“We think that volatility will be a lasting feature during the back half of the year, with markets likely to enter a game of ‘will they, won’t’ as they digest the Fed’s response to each incoming data point on inflation and the labor market,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management – U.S.

The Midyear Outlook also presents RBC Wealth Management’s house view for regional equity and fixed income markets in 2021, as well as currencies and commodities markets.

About RBC Wealth Management – U.S.

In the United States, RBC Wealth Management operates as a division of RBC Capital Markets, LLC. Founded in 1909, RBC Capital Markets, LLC. is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority, the Securities Investor Protection Corporation, and other major securities exchanges. RBC Wealth Management has $500 billion in total client assets with more than 2,000 financial advisors operating in 180 locations in 42 states.

Media Contact

Jenny Paffel, RBC Wealth Management, 612-371-2239, jenny.paffel@rbc.com.