'20 Questions

Topics - Macroeconomics

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'20 Questions

2020 is almost over, but it has left many questions unanswered. This week, I’ll answer eleven of them in a not-so-fond farewell to the year. It will be forecast-free. If you want forecasts you can go to any news site or turn on any TV channel. Or wait in line anywhere. Happy New Year!

What were the biggest lessons of 2020?
The first is that forecasting is very difficult. Congratulations to anyone who predicted that there would be a global pandemic. Not sure you can give the same props to folks who predicted a recession but not a pandemic. Or to those who predicted a strong year for markets (and a strong economy).  

That gives us a nice segue to the next question – why were markets up despite the pandemic, the recession and just generalized badness in the world?
The optimistic answer would be that market participants are thinking past the short-term problems and taking a positive view of the global economy’s long-term prospects. The best performing sectors this year such as technology point to a benign view of the future. 1 1 Close Unless you think it means robots will take over the world.   However, I can’t help but be a little cynical and think that the enormous fiscal and monetary easing had something to do with it.  

What does this cynical view tell us?
It reinforces a lesson we’ve been taught many times over the past few decades – which is that markets can weather pullbacks in the economy, financial crises, pandemics, the final season of Game of Thrones, so long as authorities are willing and able to react to offset them. The question for markets is: are they willing and able?

Hey, I’m the one asking the questions here. Are they?
Great question! As far as being able – the answer is yes. The Fed’s dispelled the myth that central banks were almost out of ammunition to counter a downturn in the economy. 2 2 Close This is one that seems to be repeatedly disproven.   Fed members proved that they can come up with a new program for just about anything. Whether the programs were helpful or will ultimately turn out to be counter-productive, they certainly had a significant effect on markets and the economy. However, it is less clear whether central banks will be willing to act in the future. The Fed seems committed, but in a previous wrap up we discussed how higher inflation might make the Fed less keen to add stimulus.  

What about the fiscal side?
This year we saw some extraordinary measures, but in parliamentary systems gridlock can assert itself without warning, even during the rare times when there is consensus among the citizenry. It’s difficult to count on this in perpetuity. 

On the topic of politics, will we be talking about elections as much in 2021 as we did in 2020?
At the risk of making a forecast, I’ll say no. The Georgia Senate run-offs will draw some attention early in the year. In Germany, there may be a leadership change in the CDU where we will see a successor to long time Chancellor Angela Merkel. There will likely be an election in Japan in the fall, but Prime Minister Suga and the LDP party are prohibitive favorites. There won’t be the same intrigue as there was this year. 

If it’s not elections, what should we be looking at in 2021?
The vaccine roll-out is the biggest event in the first half of next year. If that is successful, the service sector will come into focus. It has still not recovered to anywhere near past levels. 3 3 Close In the U.S., real consumer spending on services in October was still down almost 7% from its February peak according to data from the Bureau of Economic Analysis (BEA).   As activity improves, we will slowly get more insight into what the post-pandemic economy will look like. It will probably be very different from both what we knew last year and what we’ve seen this year.   

Coming into 2020, the trade war between the U.S. and China was arguably the biggest concern for investors. Will that come back in 2021?
The Biden administration will probably not be as confrontational and does not seem as keen on tariffs. However, the two countries’ economic interests will continue to diverge. Sentiment remains negative on both sides. The tensions aren’t going away. 

What happened in commodities this year?
Most commodities got hit hard in March. Since then, many recovered nicely, but the path has been uneven. Precious metals led the way in the Summer, but grains outperformed in September and October. Crude oil is still a little below where it was last year. Commodities have been on the upswing recently.

With equity market valuations near tech bubble highs, is it time for our readers to crack each other’s heads open and feast on the goo inside? 
Yes it is, Kent. (This should not be taken as investment advice. This is solely for information purposes.) 4 4 Close https://www.youtube.com/watch?v=KojYatpLPSE  

What is the case for optimism in markets in 2021?
The combination of recovering growth, low inflation and loose monetary policy is about as good of a macro backdrop as you can get.

 

What We Are Watching

Georgia Senate Polls 
With few major data releases or central bank meetings scheduled through the end of the year, market focus will likely shift toward near-term efforts to pass a fiscal deal and the Georgia Senate run-off elections scheduled for January 5th, which will determine partisan control of the U.S. Senate. The outcome could have major implications for the path of fiscal policy in the next two years. If Democrats are able to win both seats, they would control a narrow majority in the Senate, fueling expectations for increased government spending and higher taxes on corporations and high-income individuals. Given that moderates in the party would likely restrain policy to some degree, these changes would probably be more modest in scope than under the “blue wave” scenario investors were contemplating before November. Nonetheless, the market reaction to this outcome would likely be directionally consistent, featuring higher bond yields and perhaps higher equities as well. With less than three weeks to go before election day, polls will start to be more closely scrutinized for signs of emerging advantages in what so far appear to be very close races.

COVID Vaccine Rollout 
The FDA’s emergency use authorization of the Pfizer-BioNTech vaccine, and (as of this writing) expectations for a similar authorization for the Moderna vaccine within the next few days, may mark the beginning of the end for the COVID-19 pandemic. Given the results of the Phase 3 trials for both products, expectations are for a highly effective vaccine program with minimal side effects for patients. The rollout plan currently gives priority to healthcare workers and other vulnerable groups but it should gradually expand to the broader population as the supply of vaccines increases. About 2.9 million doses are expected to be distributed in the U.S. by the end of this weekend, and Pfizer has said that 25 million doses will be available in the U.S. by the end of December. 5 5 Close “Pfizer Expands Covid-19 Vaccine Rollout to Hospitals Across the U.S.” Wall Street Journal, December 15, 2020.   Federal officials expect about 100 million immunizations by February or March. Market participants will continue to monitor the vaccine rollout to assess developments in both supply and demand, as some estimates suggest that a large portion of the U.S. population is still unsure or unwilling to take the vaccine. Faster-than-expected immunizations would likely support risk sentiment, while any unexpected setbacks would be a headwind for markets. 

 

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