2021 looks positive for the market and the economy

John Gonner. PHOTO CREDIT: Contributed

Looking back at the market and the economy in 2020, even with the benefit of hindsight, it is hard to believe what happened.

The shocking decline in March, with the fastest move from an all-time high on Feb. 19 to a bear market three weeks later on March 12, was followed swiftly by a very steep recovery and fresh highs in six months.

The unemployment numbers also were stunning, both in March, with more than 10 million jobs lost in two weeks, and in the months since, when the unemployment rate dropped from a high of 14.7% in April to 6.7% in November.

The outlook for 2021 is positive for a number of reasons. First and foremost is the progress in vaccine development.

Pfizer and Moderna are delivering vaccines that have been found to be very effective and safe to use, which is remarkable.

There has never been a vaccine developed and approved for human use that used the mRNA technology that Pfizer, Moderna and AstraZeneca employed to develop their COVID vaccines.

To think that it has been done successfully for COVID-19 in less than a year is incredible. The economy and the market will continue to recover as vaccinations begin to allow businesses to reopen and activities to resume.

Government stimulus was a big part of the recovery story and it will likely continue into the early part of 2021. The fiscal and monetary stimulus is several times larger than what was applied to the global financial crisis.

Now that the election is over, it seems likely another round of stimulus will be coming soon.

This massive government stimulus to businesses and individuals acts as a salve on the financial damage caused by the economic shutdown due to the virus.

Extremely low interest rates are another form of stimulus for the economy and the stock market.

“We think that the economy’s going to need low interest rates, which support economic activity, for an extended period of time … it will be measured in years,” Federal Reserve Chairman Jerome Powell said. “However long it takes, we’re going to be there.”

When interest rates on savings accounts are near zero, people are incentivized to find a more productive use for their money by spending it or investing it in other areas. Also, low interest rates for borrowing money stimulates the housing, auto and durable goods markets. This in turn leads to job creation and economic recovery.

Technology companies and other businesses that benefit from the move to “work from home” performed very well in first couple of quarters after the pandemic began.

However, service industry companies like hotels, airlines, restaurants and entertainment have not recovered.

These industries will benefit the most from a “fully vaccinated” economy. Valuations on companies in these industries are attractive and they represent areas that have a considerable amount of upside available.

While the economic growth numbers will moderate in 2021, they will be firmly positive and will allow earnings growth to support a further increase in stock prices.

The recession that began in March, which ended the longest economic recovery in history, will likely be the shortest recession in history. I believe it will be determined that the recovery began in May which would mean the COVID recession was two months long.

The economy and the market will continue to improve as vaccinations, government stimulus and low interest rates keep the recovery going well into 2021.