Dr. David Kelly
- Following a winter slowdown, widespread vaccination should allow U.S. growth to surge later in 2021, precipitating a relatively fast rebound from a deep recession. However, the recoveries for GDP, jobs and inflation are on different timetables with important policy implications.
- A 50-50 Senate or Republican control of the Senate implies less fiscal stimulus than under a “Blue Wave.” However, federal debt will likely continue to grow sharply, threatening greater fiscal stress by the middle of the decade.
- International growth will depend on regional pandemic trends early in the year but should broadly accelerate once vaccines are distributed. In addition, a more predictable trade policy from the incoming Biden administration and stronger international economic growth should push the U.S. dollar lower.
- A commitment to maintain very low short-term rates until the economy reaches “maximum employment” could lead to a steepening of the yield curve in the year ahead, requiring an active and diversified approach to fixed income allocations.
- Earnings should rebound but overall U.S. equity returns may be constrained by high valuations. A cyclical rebound should produce at least a temporary rotation from growth to value.
- International equities should benefit from a falling dollar and lower valuations relative to the U.S., with the more cyclically geared regions outperforming.
- With returns constrained in traditional asset classes, alternative assets can provide opportunities for income, diversification and downside protection.
If ever there was a year that reinforced the importance of humility among economic and market prognosticators, 2020 has been that year. A year ago, as we outlined our views for 2020 in an article titled Investment Strategies for a Late Cycle Environment, we made no mention of the possibility that a pandemic would plunge the global economy into the deepest recession since World War II and trigger a massive response in terms of fiscal and monetary stimulus. As the year draws to an end, there is light at the end of the tunnel in the form of multiple successful vaccine trials. If 2020 was the year of the pandemic, 2021 is likely to be the year of the vaccines, allowing the economy and society to return to normal.
The brave new decade of the 2020s essentially face-planted out of the blocks and as it restarts in 2021, it will be a new normal, with higher government debt, lower interest rates, significant economic slack and higher valuations. Superimposed on all of this will be new political leadership in the United States. In the pages that follow, we trace out what we believe this will mean for the U.S. and global economies, fiscal and monetary policies and asset class performance. We also try to underscore the particular importance of tried and true investment principles as we all emerge from the strange and unpleasant world of COVID-19.