2021 – An encore? Possible…perhaps even probable
While the snapback in the real economy has been remarkable so far, we are likely to experience a near-term intermission in the recovery until the vaccine is more widely distributed in the second and third quarters of 2021. With the recent surge in virus cases, hospitalizations, and deaths in the U.S. and in Europe, the house lights are starting to dim again on the economic recovery as a result of increased shutdowns. The line of unemployed workers waiting to get in to file first-time jobless claims is still wrapped around the block, and small business revenues are starting to roll over again.
Fortunately, the Republicans and Democrats in Washington were able to make concessions in December and deliver another $900 billion COVID-relief package (approximately 4% of GDP) to help areas of the economy that are still stuck in their seats.
With President Trump exiting stage left and President-Elect Biden stepping into the scene, U.S economic, regulatory, and international policies are going to change. Passage of the major tax and fiscal spending programs that Biden campaigned on looks less likely following the November general election results for the House and Senate. The state of Georgia has a senate election run-off for the two remaining seats on January 5th. The Republicans secured 50 seats in the Senate following the November national general election, and current betting markets favor Republicans to maintain their majority by better than 70% odds. Financial markets are applauding expectations for a divided government with no major changes in corporate and personal income taxes, and expectations for improved relations with our international trading partners.
Spotlighting the release of the blockbuster vaccines, we are much more confident in our optimistic economic growth estimates for the full year of 2021. The FDA has granted emergency use authorization for the Pfizer/BioNTech and Moderna vaccines, which are currently being distributed according to a phased approach based on dosage supply and people most at risk. Given projected supply production estimates, we expect there to be sufficient U.S supply to vaccinate everyone around midyear, and for the U.S. to achieve herd immunity in the third quarter. There are many known risks around the immunization schedule; chief among them the willingness of the general public to receive the vaccine. We are encouraged by recent surveys indicating that more than 60% of Americans would be willing to take the vaccine.
Rollout of the vaccine to broader populations during midyear is expected to release pent-up demand for travel experiences and live, in-person entertainment that has been bottled up during the pandemic. U.S. consumers have used their time at home to build up excess savings and have taken advantage of cheap tickets for home mortgages to refinance debts at much lower interest rates. The next round of stimulus checks and extension of the Paycheck Protection Program will likely keep growth popping again in 2021. While the long-term trend for GDP growth is 1.5% to 2.0%, we wouldn’t be surprised to see annualized quarterly growth rates hit 6% this summer.
This report was prepared by J. Brian Henderson, CFA, Chief Investment Officer for BOK Financial.
More from the Report:
"2020: The Movie" through a market lens
A suspenseful horror film with a happy ending…at least for the financial markets. S&P hits a new all-time high; even the bond market bounced back.
CARES Act, interest rate cuts with more quantitative easing and vaccine process set the stage for a sequel.
What’s the script for the 2021 financial markets?
2020 – The Sequel “2021” shows promise for above-average performance…but sequels often lag the original.
Expect above average economic and profit growth, but – SPOILER ALERT – much of the 2021 good news is already priced into current market levels.
Interest rates are likely to remain low; the Fed’s spotlight will be on balance sheet expansion to keep P/E multiples elevated and credit spreads tight. 2021 performance will be driven primarily by earnings.
Arm-chair predictions for overall 2021 market performance
- U.S. Equities – Single digit returns
- High Grade Bonds – Low starting yields and improving GPD growth will make for a tough year as long-term rates creep up
- International Markets – More room to run as the global economy improves
- Bottom line – Above average economic growth and average market returns