While we have turned the page to 2021, we have not necessarily started a new book. Rather, we have optimistically moved to a new chapter. All of the same characters will have to continue down the same plotline we have endured in the past, but like all good books, we will move into this new chapter with an understanding of what has already happened to allow us to propel forward. We have spent enough time talking about the prior year and what has happened, so let’s take some time to look forward and talk about what our expectations are for the year ahead.
The intent of our letters is to provide commentary and context for varying financial and economic conditions. We will try to keep them lighter moving forward and we will provide more specifics and details in our blog, which can be found on our website. These letters, as well as additional content, can already be found there with more posts forthcoming.
So, what is in store for us in 2021? As we said above, we already know the characters of this impending chapter: the virus, politics and the economy being the key players. Let’s look at each of their plotlines for this year.
The virus - Can the third wave be held in check?
What we want to know is twofold. Can we do it? We hope that the answer is obvious; yes, we can! What we probably really want to know is “when will that happen?” While we are in the throes of the third wave now, we have learned how to control the spread already. We know the source of the current outbreaks (not adhering to social distancing and mask use guidelines) and as we saw in the prior two waves, when infections rise supportive policy will be implemented to maintain control. We have already observed this policy shift around the country in response to the third wave. We will certainly see a surge coming out of the holidays but our expectation is that we will have this wave under control early on in 2021. With control of this current outbreak in the first half of the year concurrent with widespread rollout of the vaccine, we feel that it is reasonable to expect that risk of further widespread outbreaks and shutdowns will have passed by the second half of the year.
Can we finally stop talking politics?
With much of the election cycle behind us, we have enough clarity to move forward. Looking forward we feel we are heading into an environment where volatility will be allowed to subside. We still have one more hurdle to overcome on the political front as we look to the run-off in Georgia to determine control of the senate. That will be determined early on in 2021, which will give us plenty of runway to adjust to a different political environment and be able to react accordingly.
So, what’s in store for the economy?
We learned a lot in our last chapter of how to adapt to our current environment and continue to grow. We think these lessons will continue to be as fruitful in 2021 as they were in the back half of 2020. On our blog over the next month, we will be focusing in detail on the four main components of our economy. For the purpose of this letter, we anticipate that three of the four components, consumer spending, business investment and government spending will all be positive catalysts this year, with net exports being the lone drag on our economy.
We continue to be optimistic for 2021 as we move on from 2020. It is important to note that while we have moved on from the depths of last year’s recession, we have not fully recovered. The equity markets have bounced back but we still have plenty of slack to make up in the economy, especially in consumer confidence and the labor market. The recession of 2020 was not a normal economic recession; it was policy-induced. This is kind of a mixed bag with good news and bad news. The good news is that policy helped cause the recession and it can, and will, help us continue to recover from it. The bad news is while we technically had a recession, we are not completely out of the woods as we look forward. Our economy relies on distinct phases of the business cycle to continue to grow. We are currently anticipating that we may be due for a more natural end to our historically long expansion phase that was prematurely brought to an end because of the virus.
So, what should we be doing then?
The simple answer is nothing. This is just something that we are keeping an eye on. It is something we are planning for and will be something that we adapt to if/when necessary. This is not imminent, nor something to be fearful of. We are currently not even anticipating that it will have a negative impact across the equity markets. For now, we feel that we are positioned appropriately with there being more upside than downside risk for 2021.
We hope that you and your family had a happy holiday and a healthy and joyous start to the New Year.
Ryan Flanders, CFA