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Monthly Investment Outlook - Fiscal stimulus fuels the economy

Wells Fargo Investment Institute - March 23, 2021

Presenter: Michelle Wan, CFA, Investment Strategy Analyst, Wells Fargo Investment Institute


title graphic: Fiscal stimulus fuels the economy

President Biden signed the $1.9 trillion American Rescue Plan into law on March 11. This front-loaded package is estimated to release $1.2 trillion in 2021. Of that total, $700 billion is targeted for consumers and another $350 billion for state and local government.

This stimulus package will likely coincide with an economy in the early stages of an upswing. We believe the spending will add to consumer-led economic growth already headed for its strongest pace in over 35 years. In our view, the aggressive fiscal support atop last year’s spending may be needed to reduce unemployment more quickly; however, side effects such as overheating the economy could pose problems.

Rising yields on longer-term bonds could present issues, especially for fixed-income investors, but historically, it has been typical for rates to rise early in a recovery. The faster pace we observe today, in our opinion, could contribute to an unusually strong economic growth rebound, and we think that bodes well for equities — especially asset classes and sectors sensitive to the economic cycle. We favor U.S. Small Caps and Emerging Market Equities — asset classes in which investors tend to be underallocated — and we favor increasing exposure to cyclical equity sectors, specifically Financials, Industrials, and Materials.