The $1.9-trillion stimulus package Congress passed this month is expected to provide a major stimulus for the U.S. economy. Key provisions of this legislation – named the American Rescue Plan -- include a $1,400 direct payment to most Americans and an extension through September of the $300 weekly supplemental unemployment benefit that had been scheduled to expire.

It’s not just individual taxpayers who will benefit. State, local and tribal governments will get $350 billion in emergency funding to pay front-line public workers, distribute vaccines, scale their COVID-19 testing and reopen schools. Small businesses that have been hard hit by the pandemic will be eligible for grants through a $15-billion fund, and state and local governments will get $35 billion to provide low-rate loans and venture capital to nonprofit small businesses.

Some analysts believe stimulus on this scale could bring a level of economic growth this year that has not been seen in decades. Now, investors are naturally asking what the impact of all this stimulus will be on financial markets.

We believe bond yields will continue to rise.

Will inflation return in the wake of the American Rescue Plan?

We could see inflationary pressures if companies can’t keep pace with the surge in demand as consumers have more to spend, and if it takes some time for companies to bring back workers and get fully staffed again.

Treasury Secretary Janet Yellen, however, doesn’t seem concerned. In press interviews, she said she doesn’t believe the stimulus will bring inflation, and that even before the pandemic hit, inflation may have been too low rather than too high. She also expressed confidence that if higher inflation did emerge, there are tools to address it.

She also noted that she expects the American Rescue Plan will bring the U.S. back to full employment by next year, a promising note for workers, given that U.S. payrolls are still 9 million below where they were before COVID-19 struck.

A whole new story for stocks even as the bull run continues

This legislation and the return to normal activity as more people are vaccinated will undoubtedly extend the already prolonged bull market for U.S. stocks. Still, a surge in economic growth would change the climate we have been in since the end of the Global Financial Crisis. With the low interest rates and slow rates of global economic growth that prevailed since then, stocks that could deliver sustained, long-term growth – like the tech stocks – seemed to be the only game in town.

Now the game has changed, however. As economic growth picks up dramatically, the beneficiaries will include commodities and cyclical stocks. That may bring a reallocation of capital, as investors shift out of those long-term growth stocks where they may have already been too heavily allocated, even before this shift.

The reflationary trade seems to have already begun as investors are shifting into riskier assets that stand to benefit as economic activity picks up. That includes not only cyclical stocks, such as the banks and energy producers, but also small-cap stocks.

Infrastructure up next

The Democrats say they are not done with their economic stimulus efforts. As noted by President Biden, the next item on the agenda would be major infrastructure legislation. The American Rescue Plan passed quickly, even without Republican support, but the hurdles for any subsequent major legislation could be higher.