And God said, Let there be light: and there was light.
And God saw the light, that it was good; and God divided the light from the darkness.
If you ask anyone in the market why they are bullish for 2021, they will tell you right away they see a light at the end of the COVID-19 tunnel. And indeed, with the multiple vaccine news we have received since the beginning of November, there is a light. There may be many potholes, with the coronavirus cases, hospitalizations and fatalities on a disturbing upward trajectory, and a very tough winter staring us in the face. But there is a light we can now all see. To have vaccines developed and now distributed in such volumes and with such tremendous efficacy levels, and done so quickly, makes one tempted to believe in miracles we thought were reserved for Bible stories.
So what lies ahead for the coming year? A very rough first quarter for the economy. And then a better second quarter. And quite likely boom-like conditions in the second half of the year as substantial amounts of pent-up demand get released. Travelling, mall browsing, bar hopping, eating out – and dare I say, socializing – will be all the rage. It is called “pent-up demand” for a reason. This will be the single dominating force driving the economy in 2021, barring any setbacks (such as not enough of a vaccine take-up to achieve the holy grail of herd immunity).
No central bank will dare tighten monetary policy even if inflation rears its head and one can be reassured, especially in Canada, that the fiscal spigots will remain turned on in a major way. Interest rates will not be allowed to rise as they have typically done in past aggressive economic recoveries. If you are a policy maker today, the last thing you will do is upset any apple carts.
So, the economic outlook for 2021 is, perhaps, the easiest one to make that I can recall in my 35 years in the forecasting business. There will be a postpandemic spending boom. It’s only a matter of how big and in what quarter it begins. That light, indeed, does shine bright. Much of this good news, as an aside, is priced into every global financial asset you can possibly name. Even the previously beaten-up airline, casino, retail and hotel stocks have priced in that glowing optimism.
But, from a financial markets standpoint, just as the economy may boom next spring and summer, even into the fall, investors will at some point in 2021 have to confront what life is going to be like once we reach the light. Just as the markets were soaring during the darkest hours of the pandemic in 2020, at some point next year these same markets will be looking beyond that light even as we all go out and have fun again. That’s the thing about markets – they move earlier and more quickly than people do.
What the world looks like when the crisis ends is truly anyone’s guess, but I will say with 100 per cent clarity that it is going to look a lot different than it did before. Not just the question over government policy, but at the individual level. Months of isolation and distancing, and fear of a return of the pandemic are going to fundamentally alter lifestyles, and will have a profound influence on how we conduct ourselves in our personal and commercial lives.
For example, working from home is certainly going to be a more dominant force, with obvious negative implications for commercial real estate but positive implications for internet infrastructure, computer hardware and video conferencing. There is going to be a sharp reduction in travel to work, travel in general, and this means fewer cars on the road. There is nothing here that is very good for the auto sector, and the future is really clouded for office real estate investment trusts and commercial real estate in the large densely populated urban areas.
But there are some bullish themes that emerge, too, as we go into an era of elevated personal savings rates where people are going to focus on what they need, not what they want. This means you should screen all of your equity exposure for “utility-like” characteristics – and that includes anything related to e-commerce, cloud services, delivery services and wiring up your home to become your new office. What lies beyond the light at the tunnel is a shift in economic behaviour that took place during this grim period of history. These shifts, I believe, are secular in nature, and tell me to focus on areas of the market – consumer staples, health care and even big tech – that have morphed into essentials.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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