2021 Outlook: A Rousing Recovery

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While COVID-19 rendered many 2020 forecasts obsolete within the first few months of the year, a number of our key calls proved accurate. We expected accommodative monetary and fiscal policy to continue and posited that a contentious U.S. political season would end without major disruptions to markets. Though 2020 was a year of many challenges, we are optimistic for 2021 and expect improved economic conditions and better times ahead.

A shot in the arm

2020 closes on an optimistic note as countries around the world begin to administer COVID-19 vaccines. The development timelines have been nothing short of extraordinary, as multiple companies were able to develop a vaccine, run trials, receive regulatory approval and begin distribution, all within a year. We expect ongoing vaccination in the first half of the year to set the stage for a vigorous growth recovery in 2021. The beaten-down services sector should be the principal beneficiary of this return to normal as the in-person economy roars back to life in the post-pandemic world.

By mid-year or late summer, we expect certain sectors such as travel and tourism to bump against capacity constraints as long-delayed holidays and other spending finally materializes. The return to normalcy and shift in consumer spending will also lead to greater demand for labor. While the U.S. unemployment rate by the end of 2021 may not match the pre-pandemic level of 3.5%, we do expect it to be meaningfully lower than the current rate of 6.7%, with strong momentum. The explosion in debt, which helped economies endure lockdowns, will linger for years, but we believe strong growth and low interest rates should minimize its long-term effects.

The policy pipeline will keep flowing

In response to the pandemic, 2020 saw unprecedented fiscal and monetary actions worldwide. Global central banks launched multiple initiatives including significantly lowering interest rates and purchasing financial assets in massive quantities. In parallel, fiscal authorities loosened the purse strings, spending aggressively to support their domestic economies. The combined fiscal and monetary support proved crucial to global economies, and by extension, global asset markets.

As we move into 2021, these levers of support will remain in place, and in some instances, expanded upon. In the U.S., for example, we expect further fiscal support from the federal government, with additional stimulus of nearly $1 trillion, or approximately 5% of the economy. We anticipate similar increases in fiscal support from major developed economies and select emerging economies as they look to bridge the gap to a full recovery. Central banks should remain accommodative in 2021 and beyond as well. The European Central Bank, for example, may increase asset purchases in the near future.

With continued fiscal and monetary accommodation, we expect a modest increase in longer global rates, as global growth accelerates and inflation ticks upward. At the same time, shorter interest rates should remain anchored at their current levels with central banks on pause for the coming year. Global yield curves should thus steepen modestly throughout the year. However, with absolute rates remaining historically low, this environment should be supportive for equities and broader risk markets globally.

Equities: Macro risks ease and earnings improve

We continue to have a favorable view on equities for 2021 due to our expectations for a vaccine-driven economic recovery and revitalized global corporate earnings. While earnings in the U.S. were negative throughout 2020, momentum turned sharply positive in the third quarter as a record high percentage of S&P 500 companies reported earnings above expectations.

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