The first quarter of the new year was productive for investors, with stock prices generally moving to the upside. The S&P 500 Index closed above 4,000 for the first time in its history. Joe Biden was sworn in as our nation’s 46th President, and his administration has the advantage of Democrat party control over Congress gained in the recent election. Wall Street anticipates spending by the federal government will be on the rise. Monetary policy also continues to be strongly supportive of economic growth, and employment is showing welcome signs of improvement as pandemic restrictions are lifted. Vaccination efforts are proceeding at a rapid pace. More than 350 million vaccinations have already been administered worldwide, and roughly a third of all Americans have received at least one dose. Expectations for ongoing remote-work arrangements are driving a generational shift in the real estate market, away from office space and toward residential properties.
President Biden has declared “the era of small government is over,” a forecast that is a relief to some and a concern to others. After just a few months in office, it is clear that the new administration is moving quickly to make federal spending a larger share of the economy. Their plans are ambitious, with trillions of dollars directed toward infrastructure, climate change, domestic manufacturing, child care, healthcare and education. These spending programs have enormous price tags that are expected to include a broad array of tax increases on corporations and high-earners.
The Federal Reserve continues to pursue highly supportive monetary policy, indicating that they intend to keep money readily available for the foreseeable future. Longer-term interest rates are established by the capital markets, and the prospect of an economy that is reopening has lifted the yield on 10-year Treasury securities to around 1.72 percent, up notably from 0.69 percent a year ago. Rising longer-term rates and Fed-imposed low short-term rates have caused the yield curve to “steepen,” which is the bond market’s way of signaling expectations for rising economic activity. While rates are still low by historical standards, they are rising enough to push investors out of cash and into bonds and CDs that offer more attractive yields.
After a year of heartache and profound changes to the way we live and work, the pandemic is beginning to recede. People who are most at-risk to the COVID virus now have relatively easy access to vaccination programs, and everyone who wants a vaccine will likely be able to get it by summertime. Our economy is reopening, to varying degrees, across the country as individual states and counties exercise their discretionary authority to roll back restrictive social-distancing measures. Some schools and businesses have been allowed to reopen, and limits on in-person gatherings have been eased. The March employment report from the Bureau of Labor Statistics was encouraging, with non-farm payrolls surging and the official unemployment rate dropping to 6.0 percent as people are able to get back to work.
Some changes made during the pandemic are likely to endure. Companies appear willing to embrace remote-work arrangements as a standard practice for a portion of their workforce, reducing the need for expensive office space and thereby improving company profitability. The amount of office space currently available for sublease is up 40 percent from a year ago and now stands at the highest figure since 2003. More flexible work arrangements are also motivating a dramatic demographic shift as workers are free to relocate to areas that provide lifestyle advantages. However, at a time when people are increasingly able to live where they want to, they are often confronted by a housing shortage due to a historic low number of homes for sale. According to the National Association of Realtors, there are roughly one million homes for sale across the country, the lowest figure ever recorded since they began tracking that data in 1982. The combination of limited inventory and attractive mortgage rates has driven home prices upward at the fastest rate in 15 years. Homebuilders are responding to the high demand, but construction has been limited by rising material costs and shortages of skilled labor. So far, economists do not believe the strain in housing will result in another credit crisis because bank lending standards have remained solid. However, there do appear to be regional price surges that are unsustainable. At some price, homeowners will be inclined to sell, which should bring the supply of homes into better alignment with demand.
The pandemic appears to be waning, the economy is reopening and Washington has both feet on the accelerator. The past year has been a time of dramatic events, and our nation is emerging from the pandemic to a world that is forever changed by that experience.
We are pleased to announce that West Oak Capital is growing. Given the large influx of families moving to the Boise, Idaho area, we are in the process of opening an office in the upscale suburb of Eagle. This second office location is in addition to our longstanding Westlake Village, California office. Idaho is currently the country’s top state for percentage of net inbound migration, according to the 2020 U.S. Migration Report produced by North American Moving Services. We look forward to updating you on our progress in the months ahead.
Our best wishes to you and your family for a wonderful Spring season, and please contact us if you have any thoughts you would like to discuss.