This year has reminded many Americans of how disconnected the economy and the stock market can be. If the economists at Vanguard are right, 2021 may turn out to be  a reverse image of 2020 with the economy recovering sharply but with equity prices moderating after this year’s rapid ascent.

In a presentation yesterday entitled “Approaching The Dawn,” Vanguard chief economist Joe Davis outlined a three-phase recovery unfolding in 2021 that could result in a vibrant second half of the year for the economy.

So good that Vanguard sees the unemployment rate falling to just above 5% by this time next year. For comparison’s sake, unemployment was 4.7% when President Trump entered office and 3.7% before the pandemic struck.

Getting there will be difficult at first. Vanguard economists think it is quite possible the U.S. sees negative growth in 2021’s first quarter. But economic activity should accelerate as the vaccine rollout starts to penetrate wide swaths of the population.

As posited by Vanguard, the recovery’s first phase will be characterized by an economy that will remain hamstrung by an "immunity gap," both for the rest of this year and for much of next year’s first quarter. Optimistic estimates are that maybe 25% of the population currently has some form of immunity.

Next, the immunity gap will transition toward a reluctance gap as the second quarter starts. By then, many Americans will have been vaccinated but many more will still be reluctant to engage in out-of-the-house normal activities like attending movies and concerts.

The third and final phase, which Vanguard dubs the unemployment output gap, will start to dominate the narrative as life returns to a semblance of normalcy and the recovery starts to assume the shape of a more typical rebound. At that point, a major concern will be finding jobs for the millions of Americans in industries like hospitality and retail that got slammed by this year’s recession.

Vanguard sees a number of industries emerging from the pandemic stronger than ever. That includes the fields of genetics and biomedicine, where the idea multiplier—a proprietary metric Vanguard developed to measure the pace of innovation—is outpacing the same yardstick when used to calculate the rate of change in computing and telecom in the 1980s and 1990s.

Davis said there is a possibility that productivity could surge in the next decade as a result of digital and other technologies embraced in recent years. For now, he noted, it’s too early to tell.

If Vanguard’s outlook for the economy is brighter than many, its expectations for equities are more muted, especially for investors accustomed to shiny returns from large-cap, tech-heavy, U.S. growth stocks.

For the next decade, economists at the giant mutual fund complex expect U.S. equities to return somewhere between 3.75% to 5.75%, quite a bit less than foreign stocks. U.S. value stocks should also outperform growth stocks, which Vanguard estimates could return a meager 2% to 4% for the next decade.

Most of the outperformance of foreign stocks is attributable to the valuation gap. U.S. stocks have simply beaten most other markets by a country mile. One Vanguard economist said there is at least a 60% chance that foreign equities will beat American stocks.

In addition, senior economist Andrew Patterson said he doesn’t expect the world’s largest economies to embrace austerity in the fashion they did as the global economy came out the Great Recession.