Published on January 11, 2021 in the Rochester Business Journal

According to writingexplained.org, the phrase “bid adieu” is used formally to say goodbye or as a light-hearted and flippant way of describing cutting something out of one's life. Based on the disruption the COVID pandemic has caused for so many of us over the last year or so, it seems appropriate to bid adieu to 2020 and to look toward the prospect of a brighter 2021. As we project hope for the coming year, let’s take a moment to reflect on the economy, the market, the geopolitical landscape and our own personal health.

The Economy

After an eventful 2020 that saw a Q2 drop in gross domestic product (GDP) of over 31% and a Q3 recovery of over 33%, Northern Trust expects growth to taper to 4.7% in Q4 and to an average of 3.7% over the four quarters of 2021 – well above average. The index of leading economic indicators has been on the mend, the Institute of Supply Management’s (ISMs) New Order Index has recovered sharply from its April low, and the unemployment rate has been steadily declining for each of the last seven months (currently at 6.7%).

Aside from the macro indicators highlighted above, manufacturing and non-manufacturing activity is again expanding, inflation continues to be tame (i.e. 1.2% for the 12-month period ending 11/30/20), and interest rates continue to be remarkably low (i.e. 10 and 30-yr. Treasury bond rates of 0.94% and 1.66%, respectively, as of 12/24/20). Additionally, non-financial companies in the S&P 500 currently hold over $2 trillion of cash, and the consumer debt service ratio is now at a 40-year low. Overall, the U.S. economy lends itself to optimism.

The Market

Global markets start the year with what most would consider to be lofty valuations. When we observe how stock prices relate to projected earnings over the next twelve months (i.e. a forward price-to-earnings or P/E multiple), we find that stocks in the U.S., Europe, Japan, the United Kingdom, and the Emerging Markets (broadly) are trading at multiples that are anywhere from 1.1 to 1.5 times their historic medians. While this sounds high in absolute terms, we should also consider what’s driving these multiples.

In short, stock prices reflect discounted future earnings. Based on favorable expectations for the economy in the year ahead, projected earnings are undoubtedly higher. In addition, a lower interest rate environment lends itself to a lower discount rate for those earnings. Discounting projected earnings at a lower rate leads to higher stocks prices – higher, anyway, than those that can be sustained in an environment of weaker economic fundamentals and/or much higher interest rates than we currently have. Certainly, there are still many things that could disrupt the lofty valuations we’re seeing in global equity markets but, for now, these valuations appear to be sustainable.

The Geopolitical Landscape

Although the recent Presidential election will continue to be a source of controversy, the U.S. equity market appears to be happy with the result. Under a Biden administration, the perception of less isolationism should lend itself to lower tariffs, a return to global trade accords, and a generally more cooperative geopolitical and global economic environment. Also, no matter what side of the political fence you’re on, just about any political party or geographic area you look at, in both developed and emerging markets, seems committed to additional stimulus, as necessary, to return the world economy to its pre-pandemic highs.

Our Personal Health

The COVID pandemic has not only taken a toll on the world’s physical health, but its mental health and emotional health as well. Divorce, abuse, and suicide rates are up, among other things, as the global population struggles to adjust to shutdowns, layoffs, social restrictions and the coronavirus itself. The bright side is that the worst should soon be behind us. Effective vaccinations should eventually lead to herd immunity, and herd immunity should, one day, allow us to return to the sort of life we knew just one year ago. Science and technology are on our side. Little by little, the expectation is that we will all begin to heal together.

What a crazy, unanticipated year 2020 has been! Sure, there are still things to worry about and the outlook for the future won’t always be as rosy as it is now, but let’s appreciate the little rays of sunshine we have in the world and look to put the past year behind us. Let’s bid adieu to 2020 and hold on to hopes for improving health, happiness and prosperity in 2021. In our lifetimes, 2020 should prove to be one year when it wasn’t very hard to say goodbye.

To see this column in the RBJ, click here.

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