It’s hard to recall another time when the consensus about economic growth has been unanimous as it is in early 2021. After a vaccination uptick in early March, economists led by Cornerstone Macro’s Nancy Lazar predicted GDP expansion of 8% to 9% this year.

That could surpass China’s economic expansion for the first year in several decades. It would also make U.S. growth in 2021 the fastest since 1959, when it rebounded from a deep recession following the so-called Sputnik shock of 1957.

Few experts doubt there will be a strong growth spurt as America reopens in the second half. After this morning's March jobs report with 916,000 new jobs created last month, there were numerous predictions of several upcoming months witnessing more than 1 million jobs added as America reopens.

The question is whether it will be a brief boomlet or something more. A growing chorus of market savants and media outlets go so far as to envision a more extended boom scenario unfolding as the decade begins. David Rosenberg of Rosenberg Research noted that no fewer than three magazines—The Economist, Bloomberg Businessweek and MoneyWeek—opted to emblazon their covers with some variant of the “Roaring Twenties” theme.

Ever the contrarian, Rosenberg punctured that notion in a client letter. Circumstances today are completely different, he explained. A century ago, the U.S. was in the peak phase of urbanization, which, as we’ve seen recently in China, generates outsized economic growth.

Technological innovation in industries from automobiles to radio propelled productivity at a 5% clip. In its early days, the Federal Reserve was willing to tolerate deflation and the Harding and Coolidge administrations “didn’t blow their brains out” with fiscal stimulus, Rosenberg continued.

Demographically, the 20th century longevity boom was still in the early stages. Only 7% of Americans were over 65 years old in the 1920s; now 20% are.

Powerful Recovery?
By attempting to ignite the economy with massive stimulus, the Biden administration is seeking to avert the anemic recoveries that followed the 2000-2002 and 2007-2009 recessions. Federated Hermes chief market strategist Phil Orlando believes Biden and his advisors are convinced that the $800 billion stimulus package in 2009 was too small.

Starting in 2008, the labor force participation rate fell for five straight years, and many unemployed Americans saw their skills deteriorate. That memory is encouraging Biden’s advisors to go big. The upshot could be a rebound that is very robust.

If the economy can reopen and if vaccinations continue to go smoothly into the fall without new Covid variants triggering another virus wave, then “this is unlikely to be a jobless recovery,” says Erik Weisman, chief economist and portfolio manager at MFS Investment Management. While conceding those are three big “if’s,” there is reason to believe that many workers who lost their jobs in the retail, leisure and hospitality industries at the epicenter of the lockdown will be able to find work.

That remains to be seen. The U.S. still has 8.5 million fewer jobs than it did in 13 months ago before the pandemic struck in February 2020.

Pessimists fear the U.S. could face another spike in cases even if 100 million Americans have been vaccinated. Markets, however, are unfazed. Over the next few months, some economic data points could be as shocking to the upside as they were during last year’s second quarter lockdown. However, the expansion could not only be powerful, but the cycle could be shorter.

“If the economy grows at 6% this year and 3% or 4% in 2022, that should be enough to generate lots of jobs,” Weisman continues. “But that could be in the middle innings of the business cycle by mid-2022.”

In a March paper entitled “When Will The Jobs Come Back?” PGIM chief economist Nathan Sheets lays out four employment scenarios. The one he considers most likely closely lines up with Weisman’s estimates of 6.5% real growth this year and 3.4% in 2022. That would be sufficient to recoup the vast majority of the 10 million jobs lost because of the pandemic by 2023.

But the investment consequences are not clear. A Bank of America Securities survey of leading asset managers found that inflation and a replay of the 2013 taper tantrum have displaced the novel coronavirus as their most serious concern.

Bob Browne, chief investment officer at Northern Trust Asset Management, notes that, from an investment vantage point, the pandemic appears to be over. Some asset managers have gone so far as to predict it could even be over from a lifestyle perspective by late April.

Yet if the markets are getting ahead of themselves, it wouldn’t be the first time. Time and time again, the pandemic has confounded all the experts and reminded everyone how little we really know about it.

America and the United Kingdom are rolling out the vaccine successfully. But Continental Europe and many developing nations are floundering at vaccinations as new variants keep surfacing, forcing renewed lockdowns. Much as many people around the world want to de-globalize, the pandemic revealed to everyone how inextricably linked nations are.

Bond Vigilantes Could Return
Eventually, Covid-19 will fade into the rearview mirror, but the trillions of debt issued to fight it won’t. Michael Cuggino, CEO and CIO of the Permanent Portfolio Family of Funds, suggests the fixed-income markets could see the re-emergence of the bond vigilantes who first appeared in the 1990s.

“Who will buy all these bonds and at what price?” he asks. “That’s another way of saying the U.S. Treasury will have to raise rates to entice buyers.”

Dovish Fed policy powered the 12-year bull market that was interrupted briefly by the 2020 lockdown. But it’s worth recalling that equities suffered steep corrections when Standard & Poor’s downgraded U.S. Treasurys in 2011 and again when the central bank raised its fed funds rates to a modest 2.5% in 2018. Equities generally dislike bond market volatility.

The only experience two generations of professional and retail investors have had with a rising interest rate environment, never mind rising inflation, are the few miniscule rate hikes by Fed chairs Greenspan, Bernanke, Yellen and Powell, Cuggino says. “Who knows how they will react if interest rates quickly move up and to the right?” he wonders.

There are other reasons besides the massive debt binge that could cause rates to spike more than people expect. The pandemic has disrupted supply chains, and some companies are now willing to pay marginally more to those vendors they perceive as more secure and stable.

Northern Trust’s Browne says this is a scenario that financial markets are only starting to reckon with. He cites a recent University of Michigan inflation expectations survey finding that participants expect prices to rise 3.1% over the next year and 2.7% over a five- to 10-year period.

Cuggino notes that the Fed is telling the market to expect “transitory,” not extended, inflation. Going up against last year’s depressed second- and third-quarter lockdown economic data, that’s a given.

He hopes the Fed is correct, but the Permanent Portfolio funds are cautiously planning for a more extended period of price hikes. “If you don’t get substantial economic growth, you could get stagflation,” Cuggino argues. “Inflation is a difficult thing to manage surgically. Market rates could decouple from the Fed’s wishes, especially longer rates. Be careful what you wish for.”

Fed Chair Jay Powell has repeatedly stated that the central bank is willing for a while to let inflation run at higher rates than the U.S. has experienced in the last decade. But it’s not even clear how long Powell will remain in his job, since his term expires in February 2022.

“Someone else could be in his seat when it comes time to raise rates,” Weisman says. That individual could be even more dovish than Powell.

Weisman expects yields on the 10-year Treasury to keep rising from the 1.73% rate on St. Patrick’s Day, though he won’t put a figure on it. The Bank of America Securities survey found that large institutions think many bonds would be more attractive than stocks if the yield hit 2.5%.

Two demographic narratives are likely to dominate the complexion of the recovery. One is that many millennials are in much stronger financial shape than they were exiting the financial crisis. They are starting to buy houses and have acquired a taste for equities. Already, they are the largest demographic group in a fast-changing labor force. Whether or not they remain more energetic savers than previous generations remains to be seen.

Baby boomers are also a wild card. For the better part of two decades, the fastest-growing segment of the work force has been people over 60 years old.

But today the average boomer is over 65 and starting to place stress on entitlements, particularly Medicare. It’s unclear how hospitable the labor market will be to older workers in times of disruption and exponential change.

Finally, there is the Biden administration’s plans for taxes. The economy and equity market managed to withstand a 39.6% tax rate on ordinary income on Americans earning incomes over $400,000 under President Clinton (then it was $250,000) and during President Obama’s second term.

But Biden’s aides have proposed raising the investment income tax to the same rates as ordinary income. Details have yet to be spelled out, but the impact for retirees living off their investments could be significant.

Orlando of Federated Hermes notes that markets got a taste of this last September and October when it became apparent Biden was likely to win. The S&P 500 fell 10% during those two months, but tech stock indexes tumbled 20% as investors with huge unrealized capital gains in these shares headed for the exits.

With the narrowest of margins conceivable in Congress, it’s uncertain whether Biden could push through all his tax proposals. But his stimulus bill adds another $1.9 trillion to a federal budget already running a $2.3 trillion deficit. That isn’t stopping Orlando from predicting that the S&P 500 will finish the year at 4,400, more than 10% above where it stood in mid-March.