Woman looks at mountains in horizon

Looking forward to 2021

by Molly Musler | Jan 20, 2021

January 15, 2021

Outlook: First quarter 2021


Last year’s contraction in the economy was extreme, but the recession of 2020 is poised to be the shortest on record. After contracting at an annualized rate of 31% in the second quarter of last year, the U.S. economy has rebounded strongly with annualized growth of 33% in the third quarter and expectations for an additional 5% increase in the last three months of 2020. If the expansion continues as expected, the economy will return to its pre-COVID size in the latter half of 2021. 

In the final days of 2020, the U.S. government passed a $900 billion aid program that extended enhanced unemployment benefits and the ban on evictions. It also provided checks to individuals in need and aid to airline employees, among other things. The government aid programs coupled with a resistance to return to full stay at home policies is allowing for a continuation of the robust recovery. As we progress through the coming year, the expansion is expected to continue, with additional strength coming from the administration of vaccines and an eventual return to more normal lifestyles.


Inflation stabilized in the latter half of 2020 after falling close to zero earlier in the year. While it has stabilized, it remains low, with the Consumer Price Index registering annual increases of approximately 1.3% in the latter months of 2020. Looking forward, we expect inflation to follow the trajectory of the economy, and as activity increases, price levels should continue to rise as well. 

U.S. Dollar

In anticipation of a global economic recovery, the U.S. dollar has declined from the extremes it reached last March. It remains at an elevated level from a historical perspective but ended the year trading at near-term lows against many currencies. As we enter 2021, we anticipate the dollar will trade with a modest downward bias as vaccines are rolled out worldwide and expectations for a global economic recovery remain intact.  

Asset class

Cash/money market instruments

Money market rates have remained in a narrow band around 0.10% since July and are likely to remain low in the coming year. Monetary policy is expected to maintain its extremely dovish stance, with no policy rate changes forecast until 2022 at the earliest. In addition, the Federal Reserve has vocalized their willingness to allow inflation to run above its traditional two percent target. In combination, these expressed views support a case that short-term interest rates will be held at a lower rate for a longer period, while allowing the economy to gain a stronger foothold. 

Intermediate government/credit bonds

Yields on intermediate government bonds have drifted upward, reflecting hopes for a strong economic recovery in 2021. Heightened government bond issuance has also been a factor as the CARES Act and other fiscal aid packages resulted in a significant increase in our debt. A strong economic recovery and higher government bond issuance support the case for higher intermediate government bond yields in 2021. 

Corporate bond spreads, or the difference in yield between U.S. Treasuries and corporate debt of similar maturities, have continued to compress over the last quarter. This reflects both anticipation of lower supply in 2021 as well as optimism of a stronger economic backdrop. Given expectations for a sustained economic expansion, spreads are anticipated to remain tight as we progress into the first half of 2021.

Tax-exempt municipal bonds

With the presidential election in the rearview mirror, municipal bond yields rallied again as strong demand overwhelmed bond issuance. Furthermore, with state revenues faring much better than projected, the outlook for municipal bonds is becoming more positive. Given the hope around the start of the vaccine rollouts, the potential for increased tax revenue, lack of relative supply, and heavy cash positions, we expect municipal bond demand to remain strong in early 2021.

U.S. equity

The U.S. equity market remained strong last quarter fueled by the rollout of vaccines, the $900 billion government aid package and a continuation of the economic expansion. In fact, high conviction in the outlook led to outperformance of some of the most cyclical segments of the market including the energy, finance and industrial sectors. This trend is also evident by looking at equity styles where large-cap value and small-cap stocks generated high returns.

Looking forward, we expect the current drivers to remain in place: the economy is recovering, vaccines have generated optimism for the long-term outlook, and stimulus programs provide near-term financial support. We anticipate these dynamics will pave the way for a strong recovery in corporate earnings while also fostering an eventual economic expansion that is not reliant on stimulus programs. This is a favorable backdrop for equity investors, and we expect the market to trend upward following the recovery in corporate earnings. However, there are likely to be some bouts of volatility given the ongoing uncertainty surrounding COVID-19 and high valuations in some portions of the equity markets. 

International equity

International equities rallied last quarter in conjunction with the U.S. markets. Notably, returns were strong across both the developed and the emerging markets as investors looked past the near-term headwinds and focused on the rollout of vaccines.

International economies are being driven by similar dynamics to the U.S. High levels of monetary and fiscal stimulus have been deployed in countries around the world which is helping to limit the immediate economic damage of the pandemic. In addition, vaccines are expected to be widely distributed as we progress through 2021. These factors set the stage for a strong recovery in earnings which is expected to drive foreign markets higher in the coming year. 


Commodity prices increased last quarter given expectations for a sustained economic expansion. The gains were focused in cyclical commodities with significant increases in prices for oil and copper, but some agricultural products also participated in the rally.  

Looking forward, we anticipate the recent trends in commodity prices will remain intact. As the economy recovers, we expect price levels to increase driven by rising demand for cyclical commodities. Demand for precious metals should also remain high given the aggressive monetary policies and the threat of inflation in the years to come.

Potential opportunities & threats


New opportunities/new markets—The outbreak of COVID-19 has presented a unique set of challenges. It also provides businesses with a unique opportunity to differentiate and develop new markets. By some estimates, technology has been pulled forward two to three years and new products and services are in high demand. Prevalent themes include the increased use of technology, home improvement, products and services that facilitate working from home, and a significant increase in the use of online retail relative to shopping in stores.  

The emergence of new technologies—The convergence of cloud computing, significant increases in computing power and the advent of the smartphone have created a connected world in which new technologies change the way we live. This convergence has created investment opportunities centered around long-term themes in which disruptive companies can capture high levels of market share in a relatively short period of time. 

The evolution of finance—Technological advancements are disrupting traditional methods of banking, finance and transfers of cash. For example, we are experiencing a global shift from paper currency to electronic payments fueled by the popularity of credit and debit cards. Electronic bill paying services and companies that facilitate cash transfers are also experiencing strong demand. This shift is still in its early stages and is expected to have a long runway as it is occurring across both the developed and the developing economies. 


Setbacks in the development of medical solutions to combat COVID-19—The rate at which vaccines have been developed is unprecedented. However, meaningful disruptions in the distribution of vaccines, or in the development of new vaccines and therapies, may slow the rate at which we can return to more normal lifestyles. 

Some signs of froth in the equity markets—The IPO market was robust in 2020 and valuations on some stocks are unusually high. Earnings are poised to rebound in 2021, but if they fail to rise sufficiently, valuations may compress. 

Debt-related issues—Sovereign debt levels were rising prior to the outbreak of COVID-19. However, in the wake of the virus, debt has increased significantly. Net long term Treasury issuance approximated $500 billion last year. That number is expected to more than triple in 2021 and handily exceed the roughly $1 trillion issued in 2018 and 2019. 

Inflation—The U.S. government took unprecedented steps to temper the economic impact of the pandemic with trillions of dollars in aid. At the same time, the Federal Reserve acted aggressively initiating an open-ended quantitative easing program and targeted programs to provide a backstop to financial markets and the economy. As the economy recovers, inflationary pressure may increase more than policymakers intend.

Trade disputes & rising protectionist sentiment Trade tensions between the U.S. and China have declined from their highs, but they remain elevated. Notably, tensions have also escalated between China and others including Australia. If this trend continues, global trade may slow and act as a headwind to growth.  

Increasing government regulation of technology companies—Several of the leading technology companies have established dominant market positions and have few competitors. As the power of these companies continues to increase, government regulators are placing them under greater scrutiny by assessing their privacy policies, acquisition plans and competitive practices.

Geopolitical risks—Conflicts in many parts of the world have escalated or have near-term catalysts that may result in a change in dynamics. We continue to monitor events across the Middle East and the South China Sea. 

Cybersecurity—Cybersecurity remains a significant issue as evidenced by persistent attacks on both the international money transfer system, SWIFT, and on systemically important financial institutions. Last year’s SolarWinds hack is historic in scale, and the long-term ramifications may be understated. 


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