It is that time of year for bold predictions! Please remember my accuracy last year when I expertly predicted a global pandemic, a historic economic full-stop, and an incredibly contentious presidential election. Oh wait! That’s right, this was the most unforeseen year anyone could have imagined; though I think that last one I probably could have predicted. No, we don’t involve ourselves with crystal ball theatrics because it just isn’t part of how anyone should live. Predictions are high risk endeavors especially when we want to put our money where our predictive mouths are. Why don’t we wrap our heads around that which we can see and make some good, educated guesses? Here are a couple of things we can see coming in 2021.
An improving economy in 2021
2020 introduced the greatest global economic impact since World War II. The introduction of a global virus may not have been new in the last 100 years but certainly the global response to it was something that has never been done. In the United States we took aggressive measures in the spring to “flatten the curve” of case counts which meant stopping most non-essential business activities. Since then, we have found an increasing inability to halt the Coronavirus from spreading to every state in the union. Shutdown of businesses has followed an uneven pace with some types of businesses being targeted for restriction far more than others. States have gone forward with their own plans which has caused incredible disruption and uncertainty in the overall economy. Vaccines of course have become the ultimate answer to creating a new path forward on business activity returning to the pre-Pandemic levels. With multiple vaccines coming from large pharmaceutical companies, we look to be creating immunity to future waves of Covid-19 which will, in turn, allow business to continue without interruption, most likely. Unemployment peaked in April at almost 15% in the depth of virus uncertainty but has since dropped to about 7% nationally. Economists believe the economy has fared quite well through the pandemic which shows how resilient we have been throughout this immense change to daily life. As we dig ourselves out of this self-imposed economic winter we look ahead to the new year where the Congressional Budget Office (CBO) predicts real GDP to grow by 4.2 percent on a fourth-quarter-to-fourth-quarter basis.
Many have predicted that the Pandemic has catapulted us into an already materializing change of life for all world citizens. Being forced to stay inside under stay-at-home orders or forcing oneself into quarantine has pushed all of us closer to the use of the internet for things far beyond e-commerce. Tele-health, e-finance, tele-conferencing, Zoom, digital payments, and virtual EVERYTHING has found a place to stay in our practical daily applications. There will be a likely rotation from internet heavy stocks which benefited from the pandemic to those old school brick and mortar stocks hit hard by shutdowns, but the internet has inserted itself in our lives for good. A whole new swathe of the global population has adopted technology to operate their lives and we will likely see continued growth in the technology sectors well in to 2021.
The good and bad of cheap money
I mean who doesn’t love cheap money?! Well, the good Adam Smith in you should be very wary of the allure of low interest rates. For most people, they have an angel and a devil which show up on their shoulder… for me its Adam Smith and John Maynard Keynes (that is one lame attempt at economics humor). “Lower for Longer” seems to be the new mantra for the Federal Reserve, the US Central Bank most responsible for controlling and adjusting the short-term interest rates in this country. As you can imagine, our country’s interest rates will have a broad influence on how the rest of the world views their own cost for capital. What is the dynamic we need to understand for a low interest rate environment in 2021? Well for starters this typically has been good for those borrowers of capital. If you were inclined to move forward on a big purchase in the coming months, then these low interest rates are screaming your name! From anything small like a computer or car to the large purchases like a home or college education financing; the cost to borrow is in the historical cellars. The downside is for those hoping to earn from banking interest rates and treasuries will unfortunately see their interest income be low for a long time to come. The cost of finding safety for your money has gone up in the form of lower interest earned on that capital. This is forcing those conservative savers to move further up the risk spectrum to find higher sources of yield on their investments. Now why on Earth would people look for greater yielding investments?
Inflation on the horizon?
Like the Ghost of Jacob Marley haunting Ebenezer from the depths of the crypt, we may be hearing inflation clanking its chains up and down the hallway. Inflation rates, or the rate at which ones purchasing power declines due to an increase in money supply, have remained low over the last 30 years. With incredible monetary policy activities drawn up in 2020 to battle the economic fallout, central banks around the world have committed to incredible increases to the money supply to make sure just about every aspect of the economy doesn’t hit a liquidity crunch because of the economic slowdown. Dollars have been dished out like never before and more importantly in such a short amount of time. The United States through the Federal Reserve Banking system has injected about $9 trillion into circulation since September 2019. Now, not all of that is stimulus through Congressional action but rather most of it is monetary operations between the Fed and its banks. Regardless, it is a big number to comprehend and it seems unlikely we won’t see prices rise because of it. One of the lids on inflation is the slowdown of growth in the economy which may be with us still in 2021 but those holding on to inflation hedges will help to keep themselves ahead of the ghost of Jacob Marley.
There are endless possibilities in 2021 just in the same way no one could have predicted the events of ’20. While it's entertaining to see if predictions come true, we are committed to focusing on areas that we can control to make positive financial impacts for you. We hope this coming year is abundant for everyone and please know we are always here to help in your continued financial endeavors.