The JPMorgan Chase (NYSE:JPM) chairman and CEO, Jamie Dimon, is bullish on the U.S. economy and expects the ongoing economic revival will move into 2023, as quoted on CNBC. Increased built-up of consumer savings thanks to unprecedented fiscal and monetary stimulus, widespread vaccination and sheer relief of the end of a pandemic will help the economic revival to continue over the medium term.
The Fed’s indication that it will maintain rock-bottom rates near zero until 2023 also supports Dimon’s thesis. “Among advanced economies, the United States is expected to surpass its pre-Covid GDP level this year, while many others in the group will return to their pre-COVID levels only in 2022,” said IMF chief economist Gita Gopinath, as quoted on CNBC.
The IMF expects the world economy to expand by 6% in 2021, up from its 5.5% forecast in January. The advanced economies are expected to expand 5.1% while the United States will likely be expanding by 6.4%, per IMF. The U.S. central bank has lifted its forecast for GDP growth to 6.5% for 2021 from 4.2% stated in December 2020. A manufacturing boom is a notable improvement in the U.S. economy as the sector expanded at the fastest pace since December 1983 (read: U.S. Manufacturing Best Since 1983: ETFs to Win).
U.S. Demand for Stocks to Rise?
President Joe Biden’s $1.9 trillion coronavirus rescue package will prove to be a great tailwind to the U.S. economy. The hefty fiscal stimulus should be great for U.S. households’ affordability and should increase households’ demand for stocks. Goldman's chief U.S. equity strategist David Kostin expects households to be the largest source of equity demand this year, followed by corporations.
Goldman raised “household net equity demand forecast to $350 billion from $100 billion, which reflects faster economic growth and higher interest rates than we had assumed previously, additional stimulus payments to individuals, and increased retail activity in early 2021," as quoted on Yahoo Finance. Corporations’ U.S. equity demand this year is likely to be $300 billion (read: $1.9-T Stimulus to Boost U.S. Equity Demand? ETFs to Gain).
Goldman's latest research revealed that net U.S. equity demand among households touched $307 billion in the first nine months of 2020. The jump in the 10-year treasury yield put stress on markets last month. But that did not curb the inflows to equity mutual funds and ETFs.
Agreed, the manufacturing boom points to a rise in inflation, but that should not cross the path of a market rally. The S&P 500 has gained 14.2% on average during periods of rising interest rates compared with just 6.4% average gain in periods of falling rates, per BMO Capital Markets chief markets strategist Brian Belski's research going back to 1990, as quoted on Yahoo Finance.
Against this backdrop, below we highlight a few ETFs that could be in high demand.
SPDR S&P 500 ETF SPY
The underlying S&P 500 Index is composed of 500 select stocks, all of which are listed on national stock exchanges and span over 25 different industry groups. The fund charges 9 bps in fees and currently has a Zacks Rank #3 (Hold).
Vanguard High Dividend Yield ETF VYM
Higher demand for equities along with solid current income makes this fund a great pick. The underlying FTSE High Dividend Yield Index which is consists of common stocks of companies that pay out dividends generally higher than average. The fund has a Zacks Rank #2 (Buy).
iShares Russell 2000 ETF IWM
Solid U.S. fiscal stimulus and a $1400-check to Americans are always positive for the domestically focused small-cap stocks. Rising rates may add strength to the U.S. dollar. This is going to favor small-cap stocks which are more domestically exposed. Since these companies do not have much exposure to the international markets, a higher greenback does not bother their profitability.
Financial Select Sector SPDR Fund XLF
With the Fed being dovish and risk-on sentiments boosting long-term yields, the yield curve should steepen further. The biggest winner of a steepening yield curve is the financial sector. Bargain hunting could also lead to some gains. The fund has a Zacks Rank #3.
iShares Core S&P Total U.S. Stock Market ETF ITOT
An overall exposure to the broader market should also prove beneficial. The underlying S&P Total Market Index tracks the broad equity market, including large, mid, small, and micro-cap stocks (read: Tax Hike Not a Big Concern? Play S&P 500 ETFs).
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Financial Select Sector SPDR ETF (NYSE:XLF): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
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