Pent up demand for all goods and services should cause the economy to grow very rapidly, potentially at a double-digit annual rate in the second half of 2021. The unemployment rate should fall rapidly, although it should still be high enough to prevent a sharp increase in wage rates. Corporate profits should surge as companies see revenues rise faster than costs and inflation could also begin to rise. Long-term interest rates could also move higher. Finally, with the economy quickly recovering and inflation and long-term rates rising, the Federal Reserve could begin to taper quantitative easing and raise the federal funds rate in the fourth quarter of 2021.

For investors, this would ultimately lead to some losses in high-quality fixed income over the next two years. For equities, a return to relatively normal earnings by 2022 could help justify the resilience of the stock market in recent weeks. However, with another 3.0% gain in the S&P500 last week, the argument for strong returns going forward is gradually being eroded. 

All of this, of course, depends critically on assumptions about the course of the pandemic, medical treatments to deal with it, and the implementation of appropriate government policies. It may well be that other countries, particularly in East Asia, do a better job in controlling the virus. Moreover, the highly service-sector-dependent U.S. economy may suffer more damage than other nations. This could allow the dollar to fall and international equities to outpace their U.S. counterparts.

Finally, however, investors should reflect on the unpredictability of it all. Just a few months ago, prospects for the global economy and financial markets looked completely different from today and we are always vulnerable to shocks. For this reason, it is important, while staying calm, to also stay well diversified on this long road to a much-deserved better place. 

David Kelly is chief global strategist at JPMorgan Funds.

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