Despite a government imposed economic shutdown in March and April, most sectors of the economy (outside of hospitality and travel) recovered nicely. GDP dropped -34% in the 2nd quarter but then recouped +32% in the 3rd quarter ending the year around -4%. Unemployment peaked at 14.7% in April but dropped back down to 6.7% in December. Manufacturing (as measured by the ISM Index) bottomed out in April at 42.5 but finished the year at 61.5 (above 50.0 is considered expansionary). Between February 16th and March 23rd the equity markets (S&P 500) dropped -34%. From April 1st through
December 31st the equity markets recovered +45% making this past recession the shortest ever recorded.
Generally speaking, we believe that 2021 should be a positive year for both the equity markets and the economy. On the economic side, with the momentum generated in Q3 and Q4 of 2020 with vaccines, improving employment, stimulus and low interest rates, we should see growth out of the -4% GDP hole of 2020 and see a +4% GDP for 2021. Some businesses may never recover but other have found ways to successfully innovate to the chaotic and changing environment they find themselves in. Unemployment will be stubbornly persistent. It’s likely to remain above 5% into early-2022 and only recover in 2022 or 2023 to 4.5% where it was when President Obama left office. Despite the historic equity market recovery through Q2, Q3 and Q4 of 2020, there is still room for further growth in 2021. Earnings for the S&P 500 companies was around $165 per share in 2019. That dropped to roughly $130 per share in 2020. We expect earnings to get back to around $165 per share in 2021. This along with low interest rates, plus a weakening US dollar should enhance growth prospects in the US and in the emerging markets. There’s a lot of risk in the real estate sector. Many types of commercial real estate will need to reinvent themselves to survive.
The low interest rate environment in 2021 represents a window of opportunity for owners considering an exit from their business. While we don’t anticipate a rise in interest rates in 2021, you could see some movement before year end if inflation rears its ugly head. The likely scenario is interest rate increases beginning in 2022. Under these assumptions, the exit window could begin to close as early as next year. Also, the Biden administration has promised tax increases and increased regulations. Businesses shouldn’t feel the impact of these policies until 2022 but we all know that taxes and regulations create major headwinds against growth. You are very likely see plow horse type economic growth (less than 2% GDP) under the Biden administration beginning in 2022, which is similar to what we saw under the Obama administration in 2010 through 2016. Small businesses tend to feel the impact of these policies the most. Don’t wait until the last minute. Make sure you have a plan and strategize accordingly.
Market Specific Information provided by LPL Research via Daily Market Updates 12/14/20 through 1/11/21.
The opinions voiced in this material are for general information purposes only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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