The outlook for 2021 is one of recovery, vaccine optimism and growth. But first, we have to get through Q1. There is good news: Despite stalled momentum, consumer and business confidence have been steadfast, private sector balance sheets are solid, and policy will continue to be a tailwind. For investors, 2021 will truly be new territory, with rising yields and reflation posing challenges not seen in over a decade.
- We are at the dawn of a new expansion, and markets will rightly focus on inflation, reflation and inflation expectations.
- We expect dollar weakness to deepen in 2021, as low real yields and rising twin deficits erode support for the greenback.
- In 2020, equities became increasingly linked to interest rates, leaving investor portfolios even more exposed to rising yields.
Momentum has stalled, but sentiment is steadfast
Hopes for the economy in 2021 are high. The Fed estimates the economy will grow 4.2% in 2021,1 the fastest rate since 1999, and some private forecasters are even more optimistic. But a snapshot of the economy at the start of 2021 is one of stalled momentum. First and foremost, the pandemic resurged in mid-October and has continued to worsen. In some states, this has caused fresh restrictions on school, dining and other mandated social distancing. In other states, rising community spread caused people to choose to stay home even if was not dictated by policy. For our early economic recovery, this caused a setback.
Several indicators have clearly shown a loss of momentum. Retail sales, which had surged from May to September, experienced three consecutive months of decline from October to December. At the start of 2021, initial jobless claims unexpectedly surged to over 900,000, a level not seen since August 2020. Anecdotally, the Fed’s regional survey of business conditions mirrored this as our index of economic conditions reversed course in the January 13, 2021, report.
Index of Beige Book economic conditions
Source: Federal Reserve, FS Investments, as of January 13, 2021.
Note: Index reflects net word search of positive terms (strong, strength, expand, expansion, recover) and negative terms (weak, soft/soften/softer, tight/tightening).