2021 Outlook: three things to watch

In short

• With a push towards wider immunity underway, the pain of the global pandemic should lessen as we move through 2021, but important lessons remain.
• With new leadership in the White House comes potential changes in policy, many of which could have meaningful impacts on the economy and the markets.
• Justification for economic optimism centers squarely on the resurgence of the consumer in 2021, but are investors overly exuberant?

Coming into 2020, the global economy and the capital markets were unprepared for the challenges of a global pandemic, and much of what happened during the year was overshadowed by uncertainty wrought by Covid-19. While the areas of focus for investors during this year were supposed to be an improving manufacturing economy, a continued commitment to relatively easy monetary policy, and the U.S. elections, the underlying narrative was turned on its head by a health crisis which was unlike anything experienced in over 100 years. Early parallels between Covid-19 and previous viruses such as MERS and SARS proved to be inappropriate, given the asymptomatic spread of the new virus. Fear crept into the minds of politicians and investors alike, and sharp spikes in cases and deaths led to lockdowns and a huge drop in economic activity.

However, as the first surge slowed, scientists were already hard at work searching for answers to this significant global problem. Building on work done for earlier outbreaks, vaccine research kicked into overdrive around the globe, supported by Operation Warp Speed and other programs, and undertaken by leading pharmaceutical companies and academic institutions. Concurrently, front line doctors and nurses were figuring out how to treat patients with Covid-19 more effectively, and certain drugs already in production were aiding in the fight to keep symptomatic sufferers from become severely affected – something that had been difficult in the early days of the crisis here in the United States.

With declining mortality rates and case counts came a sigh of relief, at least for much of the summer. Restrictions were reduced, consumer spending rebounded, and a sense that the worst case scenarios imagined during the depths of March were unlikely to come to fruition colored the behavior of investors for sure. But it was the vaccine progress – which has now yielded two approved vaccines here in the U.S. – and the improvement in patient outcomes that will allow us to move forward from here and hopefully learn valuable lessons from the way that this crisis was handled. The importance of public-private partnerships in research, the need for cooperation globally on issues of health policy, and the importance of improving our current health care system here in the U.S. were all highlighted in this last year, and all of these should be the focus of policymakers in the years ahead. While these should hardly be called silver linings, it is more than just blind faith that guides our belief that we will be better prepared for the next pandemic, and that the next several years will be met with progress on this front.

Politics and policy are inextricably linked, and there was plenty to talk about on both fronts in 2020. While a new occupant in the White House always brings changes to policy, the area of policy that could be most impactful to the global economy and the markets this year is trade policy. President Trump campaigned on resetting many of the relationships between the United States and its trading partners, and one of the primary areas of emphasis during the second half of his term was the inequality of the relationship between the U.S. and China. While few would argue that the playing field is equal for U.S. companies operating in China, or that there is appropriate enforcement of intellectual property protections in the Chinese market, many companies took issue with the aggressiveness of Trump’s tactics in pursuing improvement in those areas. This stance was also taken in a more limited form with the European Union, and even with Canada and Mexico during the negotiation of the updated NAFTA treaty, the USMCA.

President-Elect Joe Biden faces new challenges as he enters into office, but frankly, he could benefit from the opportunity to reset the playing field in China and elsewhere. China policy is unlikely to be as hands off as it was during the Obama Administration, but a renewal of discussions that build on January’s Phase One deal is likely to come after the first several months of Biden’s term (as these will be primarily focused on vaccine distribution and stimulus delivery). Biden will be very careful to ensure that he is protecting America’s manufacturing interests, in order to deliver on the campaign promises made in the Rust Belt that helped him win the election, but will need to be conciliatory in his dialogue in order to bring the cautious Chinese back to the table in earnest. He will also need to tread lightly with Taiwan, maintaining the progress that has been made without alienating Chinese officials.

A new opportunity lies with the European Union and the United Kingdom. With the foundation of trade policy now outlined between the UK and the EU, Biden can pivot back to a stronger relationship with the EU, while crafting the new way forward with the now trade independent U.K. All of this should help to firmly cement the manufacturing recovery that is already underway both here in the U.S. and the rest of the world, and help create a springboard for global GDP as we move through the back half of the year.

The consumer is king, and American consumers have been doing more than their fair share to support the global economy over the last decade. The massive decline in consumer spending earlier in 2020 resulted in a steep drop in GDP, and there were fears that Covid-19 related restrictions, high unemployment resulting from shuttered businesses, and fear would hinder a recovery in spending. While admittedly spending in certain areas of the economy such as travel, hotels, and on premise dining remain well below their 2019 levels, the spend on clothing and recreation have recovered back almost all the way, while spending on financial services and at home food and beverages is now higher.

What represents the most interesting change resulting from the pandemic is the increase in housing related spend. While rents and occupancy have fallen in the major metropolitan markets, core suburbs and non-core real estate markets are booming, and the housing market is hotter than it has been since the financial crisis. One of the major questions that remains is how much of the demand for services and hospitality will return post-crisis. With more people now funneling their funds into all of the joys of homeownership, will the unleashed demand meet expectations?

In addition, while the savings rate is higher, the ripple effects on consumer spending from those who were previously reliant on the services industry for income are as of yet unknown. Areas like personal care businesses and restaurants tend to be smaller and family owned, and have been disproportionately impacted in 2020. Many of these businesses have closed or will close before demand fully returns, and therefore those employed in those industries may not be able to easily find new jobs, even if consumers start to return in numbers. While much time has been spent discussing the way businesses and work will change post-pandemic, the questions around consumer behavior are just as critical, as services spend will need to rebound in order to deliver the strong growth expected in 2021.