1. We expect that economic growth and investment returns will depend critically on the course of the pandemic and nearterm U.S. fiscal-policy responses.
2. We expect widespread vaccination of the U.S. population by year-end 2021, but we do not expect the SARS-CoV2 virus to be eradicated. It will likely remain endemic, like the flu. We do not expect a full return to pre-pandemic levels of travel and socialization. Segments of the population will likely remain cautious until it is clear that the threat from the virus is largely contained and manageable. Today’s market appears to be overly optimistic regarding vaccination.
3. We expect continued partisan gridlock in Washington. Although Congress managed to pass a modest fiscal aid package just before Christmas, it did so by setting aside two divisive issues, aid to state and local governments and legal protection for companies from Covid-19 related employee lawsuits. Future bipartisan cooperation appears unlikely in view of the hostility between the party leaderships in Congress and the aftermath of President Trump’s attempts to overturn the results of the Presidential election. Market hopes for a more-cooperative consideration of national issues are likely to be thwarted.
4. We expect the Federal Reserve to maintain a highly accommodative policy stance throughout the year. We do not expect inflation to exceed the Fed’s 2% average target.
5. We expect economic growth to be moderate. Even with widespread vaccination, Fed policy support, and additional fiscal aid, we do not expect a rapid return to normal. We expect unemployment to rise for the next several months and would not be surprised if the economy contracts in the first quarter. On balance, our outlook is positive but more muted than what appears to be the current consensus.
6. We expect consumer confidence and business optimism to be buffeted by the course of the pandemic over the next several months, after which both should rise—but unevenly. The market may be looking for more of a straight-line increase in both; we see a rocky road to higher ground.
7. We do not expect conditions to normalize until after 2021, at which point the new normal will not look like the old normal. In line with investor expectations regarding the vaccine, the market appears to be anticipating a quicker return to normal.
8. We expect economic growth will be more robust globally than domestically, largely driven by strong growth in China and other emerging markets and a rebound in Europe from a particularly large decline in 2020. These expectations are in line with market expectations.
A 2021 Investing Guideline
The implications for investors of our expectations include:
1. Near-term equity performance is likely to be more volatile than normal as the market adjusts to more-realistic expectations for 2021 growth and a more extended return to normal. That process will be shadowed by the recognition that the new coronavirus will be a permanent part of the public-health picture. Still, investors may have a rosier-than-warranted outlook for stocks once the pandemic fades.
2. Equity returns will be more widely dispersed. Industries and companies will not have equal success in adapting to the new normal. And so investors are likely to be better served by adept active management than by passive indexed investing.
3. A highly accommodative Fed policy and modest economic growth will leave little room for higher interest rates, which should keep bond returns well below average. Equity returns should exceed bond returns, justifying an overweight to equities.
4. Stronger overseas growth will create opportunities for internationally-oriented domestic companies and for international equities, especially in select emerging-market regions. Investors are likely to benefit by increasing exposure to international equities.
5. A full-fledged regime change favoring Value stocks over Growth stocks is unlikely in view of the modest economic growth we expect. An allocation balanced between growth and value makes the most sense for the start of 2021, as we see it.