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- Views on Interest Rates and the Move in Treasury Yields
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- The Latest on Vaccinations and What it Means for Growth
2021 Outlook Review
December 19, 2020
As 2020 comes to a close, a new year in 2021 demands our attention. The top institutions have released their takes on what the next year will look like financially as one of the most dramatic years comes to a close. Global economic and financial outlooks have the tough task of reviewing the cornucopia of troubling events from 2020 while looking forward to what 2021 could bring. Some central themes can be picked out in the following annual outlooks but also key differences. In the decisions of what to keep in and out of the report, we can see what is expected to be the driving economic forces in the new year.
The two themes most dominant in all the outlooks were the easing of COVID-19 and a continuation of easing in central banking policy. Every report saw these as driving forces in 2021 as they were in 2020, and of course, it's no secret that these would be chosen to guide the discussions. More specifically, COVID-19 talk centered around the discovery of vaccines and what implementation of those vaccines might look like. However, the reports stressed that optimism that has stemmed from the conclusion of the global pandemic in financial markets has not caused the Fed to reconsider their easing.
The discussion of COVID-19 was dominated by a positive outlook because of the vaccine. More directly, outlooks pointed out that the vaccines were the key to unlocking the next stage of the recovery in demand that had been locked up behind involuntary and voluntary social distancing. Four out of seven reports used the term "pent-up demand" explicitly in the context of consumption growth. However, many reports noted that there are still risks related to vaccine deployment and the current near-term trend of surging new cases. In particular, Lazard's outlook dwells on these risks the most as it breaks down logistical challenges in distributing the vaccine in developed and developing economies: "Therefore, it is difficult to predict the path of the COVID-19 recession and whether a pandemic recovery necessarily leads to an economic recovery."
The consensus on lower interest rates and in general easy monetary policy across the globe lead every outlook to be bearish on fixed income, in particular, in the next year. Most reports (Wells Fargo, Vanguard, and BlackRock) pointed out that yields will remain muted in the short term while long term rates are likely to drift high leading to a steeper curve overall. In turn, bond returns are likely to be near the current low rates and well below riskier assets like equities. Vanguard sees global equities' returns "3-5% higher than bond returns." BlackRock is "underweight government bonds and sees equities supported by falling real rates." JP Morgan went on to suggest that equities are likely "to outperform high yield bonds and core fixed income." Citi's search for yield also involved dropping bonds as they see fixed income returns eroding as a result of "financial repression."
Another common argument for the abandonment of bonds was in forecasts for higher inflation. All outlooks predict that the Federal Reserve would not let its 2% inflation target restrict it from continuing easy monetary policy. Some loose forecasts across the outlooks have a bottom range of 1.6% rising up to a top range of 3.0% with a median at or just below 2.0%:
- Vanguard: "PCE at 1.6-1.8%"
- Wells Fargo: "core PCE will average 1.7%"
- BlackRock: "average inflation over next 5 years at 2.5-3.0% annually"
- Merrill Lynch: "core PCE inflation should average near or above the Fed’s 2.0% target"
- JP Morgan: inflation over the next 12 months "just below 2% in the United States"
Despite a consensus on reflation, only one outlook of the seven mentions the phrase "rate hike" in the context of the Federal Reserve suggesting that the a more hawkish Fed is not likely to make an appearance. No outlooks forecasted rate hikes despite rates at 0%.
Other common trends that are highlighted in the reports:
- Sustainability. With the growing concern of climate change and the political shift in the United States, several outlooks suggested that the theme of sustainability would guide policy and investing in 2021. From JP Morgan, "sustainability is a powerful trend that will grow in force in the coming years. We expect a big step forward toward developing a more circular economy, especially in the food industry." BlackRock prefers "sustainable assets amid a growing societal preference for sustainability."
- Digitization. COVID-19 forced many parts of our lives to go virtual from work to play, and the reports agree that trend is likely to reverse in 2021. Specifically, things like remote working, e-commerce, and other digital services. Merrill Lynch points out, "the world was already going digital before coronavirus, but the pandemic, like many other shocks in history, has hastened the pace of change."
- Inequality. Politically, the global pandemic highlighted the concern of income inequality as lopsided layoffs hit the lower classes of society the hardest. With inequality on the forefront, social unrest could force action on this issue which could have economic consequences. Five out of seven outlooks contained the term "inequality." One of them, BlackRock, said "rising income, wealth and racial inequalities are fueling dissatisfaction with the status quo."
For most of 2020, the US election grabbed the attention as much as it could in a year plagued by a global pandemic. President Donald Trump attempted to defend his presidency for a second-term as Joe Biden (now President-Elect Joe Biden) looked to defeat him. The sharp difference in policies of the candidates and the political parties they represented created concern for the economy's future as there was no clear winner until November. However, that concern for the future seems to have passed as no outlooks have hinted that a Biden might be a net negative on the economy. Instead, the focus was on the likely gridlock in Congress that would lead to a lot of limp legislation which is typically favored by the investment community.
Finally, looking outside the United States, the outlooks seem to have agreeing opinions on two key areas of the world economy. The reports see Asia (and even more specifically China) as a success story in the global pandemic. The overwhelming opinion is that those societies effectively defended themselves from the virus resurgence seen in the US. As a result, the consensus forecast sees China and other Asian economies growing quickly in 2021 and carrying global economic activity. From Wells Fargo, "China, and Asia more broadly, experienced the economic shock of the pandemic first. But those countries also have been largely successful in combatting the spread of the virus in recent months, and the economic outlook in those economies is reasonably solid."
While China and Asia are projected to come out of the global pandemic better, Europe is projected to struggle. The Euro area was already dealing with deflationary pressure before the COVID-19 crisis began as the ECB struggled to jumpstart growth in the region. The lockdowns hit European GDP hardest but did help to alleviate a lot of pressure on the healthcare system over the summer. European equities are down -7% YTD versus the S&P 500 up 12%. However, trends have reversed and new lockdowns are being implemented through the end of 2020. Most outlooks see European GDP growth trailing US, Asia, and other emerging markets.