Written by Keith Wirtz, Chief Investment Officer, Union Savings Bank
After facing an unprecedented pandemic, a divided political climate, widespread economic and labor disruptions in 2020, many of us were ready to turn the calendar page to a new year. With that in mind, here’s to turning the page and bringing in optimistic news about 2021.
Just how optimistic? Well, we do see early signs that 2021 might be better across the board. And what’s the key to everything? One of the biggest keys appears to be a successful rollout of one or more of these new vaccinations to push us out of the health crisis we are in today. As our trusted medical and government officials work on the vaccination plan and the economy starts to turn around, I’ve outlined five key areas where I think we will see progress in 2021.
More Stimulus Packages & Modest Tax Changes
Now that election season is officially over, the federal government will be operating under one-party control for the next two years. Therefore, it’s likely that more stimulus and relief packages are headed our way, which will certainly benefit the economy as a whole and may lead to a stronger than originally expected recovery. This also opens the door to modest changes in tax policy based on President Joe Biden’s campaign proposals, such as increased taxes on capital income and a higher corporate tax rate. However, given the reality of today’s pandemic and the fact that Democrats only have a slim advantage in the Senate, we don’t expect any major changes until 2022.
Better than Average US Economic Growth
Last year was all about the pandemic and partial shutdowns. This year is all about economic unleashing and recovery. At this time, the economy is showing signs of the desired “V-shaped” recovery. US GDP was high during Q4 of 2019 and into Q1 of 2020, only to take a major dive in Q2 of 2020 as much of the country shut down due to COVID-19. However, the domestic economy returned to growth in the second half of last year, and expectations are for strong growth in 2021. Forecasts this year range from 3.9% to 6.3%. At USB, we are looking for real growth of about 4.5% in 2021, with much of the acceleration evident in both Q2 and Q3.
Make no mistake. People are ready for normality to return. The economy may be like a coiled spring, as we sense that there is a pent-up condition to travel, to spend, and to move on with daily life.
A Slow but Improving Labor Market
COVID-19 had a major impact on the job market in 2020, with more than 22 million jobs destroyed in the March to July period. As the second half of last year unfolded, we saw a substantial number of jobs return, and, in fact, about half of what we originally lost was recovered. With that said, labor markets finished the year at about a 6.7% unemployment rate.
With the premise that the economy will completely open up, we’re expecting the unemployment rate to decrease to about 5.7% by the end of the year. It’s not nearly as good as it was pre-pandemic, but it’s a great improvement from the double-digit numbers we saw at the low point in 2020.
A Strong Outlook for Stocks & Bonds
For the capital markets, investors enjoyed returns that were surprisingly strong given the pandemic situation of 2020. In particular, U.S. stocks were the standout performer in 2020. The good news for this year is the fundamental picture for 2021 for the equity markets looks very positive. Specifically, we’re expecting substantial profit growth for the companies in the S&P 500 index this year and have estimated that per-share earnings will come in at $168. This strong outlook is supported by an economy that is opening up and by the low-interest-rate environment that exists today.
The quick-phrase goes like this: Last year, earnings collapsed, but equity returns increased due to valuations expanding. This year, earnings explode, but valuations are slower to respond as company fundamentals catch up to the valuations established last year. Equity returns could be solid in 2021, but it seems unlikely that investors will enjoy the kind of generous return numbers we witnessed last year.
Work-from-Home Policies May be Permanent
The majority of companies were not prepared to change their operating structures when the pandemic hit. But overall, they adapted well to the new “work from home” arrangements and remote policies. In fact, survey results indicate that the experience for employees and companies was generally positive. Not only does it allow for more flexibility while working safely from home, but a majority of employers (74.7%) saw that employee productivity was equal to or greater than expected. A majority of employees (87.2%) said their experiences met or exceeded expectations, according to a University of Chicago study.
Working from home has fundamentally changed the structure of how we do business, and we can certainly expect more flexible policies to continue post-pandemic.
2020 was a tough year, but there are early signs that the economy, labor markets, and capital markets will continue on a path to full recovery this year. With interest rates low and a pent up level of demand from households to spend, this year may be all about growth. Businesses should prepare accordingly.
Keith and our team of USB financial advisors bring worldly expertise and local knowledge, and service to the table for every discussion. Call us today and set yourself, your business, and your employees up for success in 2021 and beyond – 866.872.1866 or visit uninosavings.com.
Notice: This is a general communication being provided for informational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. By receiving this communication, you agree with the intended purpose described above. Union Savings Bank and its’ representatives are not suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax, and other professionals that take into account all of the particular facts and circumstances of an investor’s own situation.
Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be appropriate for all investors.