A bungled vaccine rollout, another coronavirus wave and an insurrection failed to derail animal spirits verging on delirium in financial markets as 2021 began.
That, of course, is to be expected because financial markets are focused only on the long term. This narrative runs through a series of Wall Street predictions that U.S. equities could levitate another 15% or 20% this year. Some seasoned market observers like GMO’s Jeremy Grantham warned that America was experiencing a bubble of “epic proportions.”
Others found themselves vexed at the yawning disconnect between the real economy and U.S. equities. After all, more than 10 million Americans are on unemployment, and millions of small businesses are hanging on for dear life.
Incongruous though it may appear, good things are bound to come out of this pandemic. Biomedical technologies are likely to enjoy quantum advances. Economists at Vanguard compare the exponential rate of innovation today in biomedicine to the huge leap forward that information technology saw in the 1990s. Others believe the mRNA breakthrough behind several vaccines could soon be applied to treating cancer.
Part of the euphoria is rooted in the expectation of a strong economic rebound as the pandemic fades in the second half of the year. Many economists see GDP in the U.S. rising between 4.5% and 5.5% for the year.
For the comparison’s sake, GDP has only hit 3.0% once in the last two decades—and that was in 2006. Jim Paulsen, chief market strategist at the Leuthold Group, thinks current estimates are wrong and boldly predicts GDP will jump 6%, which would make this the best year since 1984.
As we enter 2021, it is clear many Americans have saved a boatload of money and can’t wait to return to normalcy. Nicholas Christakis, a doctor and sociologist at Yale and the recent author of the book Apollo’s Arrow, chronicles the pandemic’s path across the planet and hints that by the end of the year we may witness a wave of licentious orgies and hedonistic hijinks from people flush with cash and fed up with cabin fever.
That’s the new Roaring Twenties scenario pervading stock market psychology. Some bulls even see the Democratic control of both houses of Congress as a positive sign that further stimulus is on the way. While Democrats’ twin Senate victories in Georgia prompted many advisors to prepare their clients for higher taxes, the stock market celebrated the prospect of higher interest rates by sending bank stocks surging.
A Dose Of Reality
How much of this optimism is just fantasy remains to be revealed. Robert Doll, Nuveen’s chief equity strategist, sees 2021 as a year when earnings, which he expects to climb 21%, will have to play catch-up. Doll sees the S&P 500 advancing only 7%.
Two sober realists at MFS, Rob Almeida and Erik Weisman, need even more convincing. In their view, asset markets entered 2021 priced to perfection.
Just assume that kinks in the vaccine rollout are finessed and that signs of productivity gains from work-from-home digitization are transmitted throughout the Main Street economy. “Put aside the fact that a large percentage of the population wants to wait and see on the vaccine. The glass isn’t just half full—it’s overflowing,” maintains Weisman, MFS’s chief economist.
Almeida looks at this from another perspective. Go back 15 months to the fall of 2019 when no one had ever heard of Covid-19. Corporate profit margins were already falling, GDP growth was subpar, and companies were overly reliant on financial engineering to beat their earnings estimates.
Almeida argues there are still a lot of large, public U.S. businesses with 7% operating profit margins masquerading as entities with 11% margins. Some companies looking for growth are entering new industries. Apple, for example, is going into the automobile business. Bold, outside-the-box moves like that rarely expand margins.
Both Almeida and Weisman don’t doubt GDP could easily rise 5% or 6% this year. “That’s a one-off. I don’t disagree, but what is the durability?” Almeida asks. “The market is looking out six to nine months. We’re looking at the long term.”