Stars seem to be aligned for strong economic recovery
The conventional wisdom is that 2021 can’t help but be better. Vaccination is now underway in many countries, and asset prices are certainly reflecting optimism about the post-pandemic future. The performance of the world economy in the months ahead will hinge on several factors:
The course of COVID-19
Infections are still at high levels in many parts of the world, and new variants of the virus are spreading rapidly. Formal and informal restrictions on movement will remain a primary containment strategy until a high percentage of the population has been immunized. Public health measures will continue to limit economic activity for months to come.
The limits of economic stimulus. Central banks are at the edge of their effectiveness, and governments are experiencing bailout fatigue. Europe and the United States approved supplemental budget measures at the end of last year to assist businesses and workers. But with debt rising and an end to the pandemic on the horizon, policy makers are becoming more inclined to let economies operate on their own.
Paradigm shifts
The new US administration, a last-minute Brexit agreement, and lasting impacts of COVID-19 are among the environmental elements that will bear significantly on economic performance this year. Tensions between China and the West, along with the difficult circumstances faced by some emerging markets, will also warrant close watching.
The US economy
Major U. stock indexes have set 32 record highs in 2021 so far, and this reflects a rosy view of the recovery ahead. Expectations for a far more rapid recovery than was experienced post the 2008 global financial crisis are based on the following:
1. The stimulus in 2009 was late, small, and faded too fast. Today’s stimulus has been timely, huge, and very persistent.
2. In a COVID-19 world, much of the stimulus effect has been deferred until the economy reopens.
3. The corona crisis should leave much smaller economic scars than the biggest banking and real estate crisis in modern history (in 2008).
4. Household balance sheets were deeply damaged in the last cycle; they are in great shape today.
In addition, according to the Congressional Budget Office (CBO), the economy did not reach full employment after the 2008-09 recession until 2017 – almost eight years later. Current expectations are for full employment by Q3 2022, or nine quarters into the recovery.
The year is already off to a running start. Retail sales were up 5.3% in January, month over month, after economists expected only 1.2% growth. Sales of existing homes rose 0.6% after economists polled by Reuters forecast a 1.5% decline in January. The 12-month year-on-year sales total is +23.7% to 6.7 million units. The median price is up 14.8% y/y. The real estate market is extremely tight. At January’s pace, it would take under two months to exhaust the current inventory (six to seven months is normal).
Fourth-quarter 2020 GDP was just upgraded to +4.1% (annualized and after inflation), and the Atlanta Fed’s real-time model sees +9.6% growth for the first quarter of 2021, more than double its forecast of 4.5% on February 10. Industrial production is up 17.4% since last April’s low, and its manufacturing component is up 23.8% from the April low, and down only 1% year on year. Industrial metals, particularly copper, are a key barometer of industrial recovery, and they are pointing sharply up.
Corporations have become far more productive and profitable – with nearly 90% of S&P 500 companies having reported their revenues and earnings for Q4-2020, sales have beaten expectations by 2.9%, and earnings have beaten estimates by 17.3%. An amazing 81% of the reporting companies have delivered positive earnings surprises, and 75% have beaten revenue forecasts.
The fourth industrial revolution – a fusion of advances in artificial intelligence (AI), robotics, the Internet of Things (IoT), 3D printing, genetic engineering, quantum computing and other technologies – continues to change how we live, work, and communicate. Consumers have paid off much of their debt and are flush with cash, ready to spend when the coast is clear. The personal savings rate was 13.7% in December, almost double the 7.6% rate a year ago.
In short, the global economy and in particular the United States is poised for a strong recovery and long-term investors should view any pullback of markets as a buying opportunity for quality equities. As always, the road ahead is bumpy, but the direction is assuredly in a northeasterly direction.
Selwyn Gerber CPA is an accredited economist and personal financial planner. He is the co-founder and chief portfolio strategist at RVW Investing LLC (www.RVWWealth.com), based in Los Angeles and serving clients globally.
David Zwebner is a licensed portfolio manager and founder and president of Commstock Trading (1981) (www.ecommstock.com), based in Israel. Commstock exclusively represents the RVW IntelliBeta Wealth System in Israel.