The Week Ahead – New Year, New Economy

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

As we head into 2021, the focus is squarely on distributing vaccines and getting to a future where Covid-19 is discussed in the past tense. Of course, the last time we had a pandemic of this magnitude was almost exactly one-hundred years ago. There have been many parallels drawn between the current backdrop and the Roaring Twenties, with the biggest coincidence being the devastating H1N1 virus known at the time as the Spanish Flu. In the wake of World War I and the pandemic, this period was marked by massive pent up demand, which led to a decade of wild economic prosperity and cultural progression. Not unlike 1920, the world is heading into the New Year with a lot of economic momentum. As we have mentioned before, many of the most powerful stimulative policy measures effectuated in the spring take 12-18 months to be fully realized. Now with an additional $900 billion fiscal package going into effect, it is looking like economic growth in first quarter could be supercharged. Prior to last week’s passage of the stimulus, the consensus among economists was for Q1 GDP growth to be a somewhat disappointing 2.5% annualized rate. The autumn spike in infection rates have taken a toll on re-opening the economy – impeding the recovery. Indeed, many states have instituted draconian lock-downs in the interest of public safety. If just half of the money earmarked for consumers is spent in the first quarter, aggregate spending would increase by a whopping 7%. Many economists have already doubled their economic growth forecasts to the 5-6% range; however, I suspect there is actually upside risk to these raised expectations (particularly if the relief checks go from $600 to $2,000).

Beyond the massive amount of stimulus still in the pipeline, there are multitudes of factors supporting continued synchronized global economic growth. One of the key dynamics to pay attention to is inventories, which are expected to continue to rebuild from their currently low levels. This Friday we will get greater clarity when we see the wholesale inventories print.

With unemployment at nearly 7%, the Roarin’ 20s comparison is perhaps a bridge too far at this point, but there is no denying many parts of the global economy are booming. And, while I do not think we will see flappers and jazz making a comeback, the lagged effects of ultra-easy monetary policy and massive fiscal support are setting up for an economy that just might be the bee's knees.

Data deck for January 4–January 8: