Coming Into the New Year – I Can See Clearer Now

December 8, 2020
Coming Into the New Year – I Can See Clearer Now

Now that the presidential election and the development of vaccines for COVID-19 are somewhat behind us or at least more certain, I can see more clearly now. In turn, my economic forecast has become clearer than it was a month ago. All investors are able to see more clearly, and the stock market movement this month shows this to be the case. The Russell 2000 Index, which represents small-cap stocks, was up about 20% in November, and large-cap stock markets had the best month since 1987, according to The Wall Street Journal

Obviously, investors like certainty. 

Uncertainties Are Still Present

There are still some worries at hand. My first caveat surrounds the blue wave sentiment regarding which political party is going to control the Senate. If the Democrats control the Senate, my view of the economy and markets are going to change. The headline issues, which the Democrats have been focusing on, will have the ability to impact not only outright supply/demand for various items, but could throw a major curve ball regarding business sentiment. Rising taxes could hurt earnings growth and investor sentiment. 

I will have to re-think and adjust my view if the Democrats win the Senate. This is not a politically biased statement, but I think due to the uncertainty that could be launched given a blue wave, my outlook will become dimmer.

My other concerns are the increasing number of COVID-19 positive cases and the fact that the employment picture remains dour. Weekly initial unemployment claims are still very high–as of Nov. 21, nearly  780,000, according to the Department of Labor (DOL). Prior to the economic shutdown in mid-February, the DOL reported weekly numbers at 210,000. The jobs market is still not particularly healthy. Many states have reentered some level of virus shutdown, which negatively impacts economic activity, just in time for the holidays.   

People are still clamoring for more rescue money from Washington. The real weakness in the private sector of the economy continues to reside in the consumer-services sector. Think of retailers, restaurants, airlines, cruise lines, hotels…you get the picture. People are still not gathering in large groups and probably won’t do so until the vaccines are widely distributed. Even then, the sectors mentioned may not return to their “pre-virus” days. 

My other ongoing concern is the weakness of state and local governments. According to an article in The Wall Street Journal, Moody’s Analytics (a well-respected financial analytical firm) estimates that state and local governments are facing a $70-$74 billion shortfall in revenue (as compared to spending) this year. Moody’s estimates that the state and local deficit could expand to $268 billion in 2021 and $312 billion in 2022. These are government entities that can’t simply borrow their way out of deficit spending or print money (as the federal government is able to do). What are these government entities to do? Cut spending or raise taxes? Neither of these solutions adds to a positive growth recipe. 

Currently, employment at state and local governments is falling, and without a federal bailout, employment is expected to continue under pressure. According to The Wall Street Journal, by October of this year, state and local governments had shed 1.2 million workers from payrolls. These government entities represented 3.5% of the U.S. economy and 13.1% of all jobs in 2019, making it a more meaningful sector than all of retail spending for both jobs and percent of overall GDP activity. And as noted above, the real financial pain is just starting.

I believe a rescue spending bill is on the horizon, but we may see continued economic weakness during the fourth quarter of this year, spilling into the first quarter of 2021. Economic momentum next year is probably going to be more like a light dimmer switch, not an on/off switch. Economic growth should be positive next year and back-end loaded. 

But all of that being said, I suspect we will start the year rather weakly as the virus continues to spread during the winter months, and people remain huddled in their homes. J.P. Morgan is calling for negative GDP growth during the first quarter of next year. I wouldn’t be surprised if this occurs. This is all part of my original view of the shape of the recovery – to resemble a Nike “swoosh” rather than a “V” that the stock market is reflecting.

Lastly, I suspect we will see the distribution and application of anti-virus vaccines to be widespread by the start of the third quarter of 2021. Herd immunity, along with the vaccine, will hopefully result in our lives starting to return to normal by this time. Consumption activity should rise rather significantly as well as capital spending. Business sentiment should respond positively which will help spur a rise in business spending.    

In the End, 2021 Should Show Strong Growth

With those caveats being covered, and assuming the timing of the issues mentioned above, I am estimating GDP growth at 4% next year. If this comes to pass, growth in 2021 should be the strongest that our economy has experienced since 2003. Add in my expectation of 2% inflation pressure, and I would expect a nominal GDP growth of 6%. That fosters a corporate top-line growth rate of between 6%-10% next year, which might generate earnings growth of 20%. Following are consensus earnings expectations for the S&P 500, according to Yardeni Research.

 Expected EarningsGrowth RateP/E Ratio

I don’t “get” the expected 16% growth rate in 2022. With that time frame being so far in the future, we should expect adjustments moving forward. 

If we look back 30 years to previous periods when the S&P 500 reported earnings increased by more than 20%, we find seven years where the average stock market return during these rapid growth years was 13.9%. The market was down in only one of these seven years (2018) for a positive batting average of .857. Since the end of World War II, the market’s annual positive batting average has been .783. History suggests the probability of positive, and somewhat large, returns have normally accompanied 20%+ earnings growth years (data provided by S&P Global).

If history is a guide, we should expect some good things from the stock market over the next 12 months.   


The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index.

The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.

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