Madness of Crowds

February 8, 2021
Madness of Crowds

“Every age has its peculiar folly: some scheme, project, or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.”

Charles Mackay – Extraordinary Popular Delusions and the Madness of Crowds – 1841

When thinking of recent activity on Wall Street, with the spiking prices of stocks such as GameStop and AMC, my thoughts harken back to the 1980s when I was advised by one of my senior managers at Northern Trust Company to read the book noted above. Today’s seeming madness of spiking stock prices isn’t something new. From the Dutch tulip bulb mania to today’s Reddit-fueled silliness, at times, investor’s greed for gain outweighs their common sense. 

Over time, common sense trumps illogical pricing action on Wall Street. Unfortunately, some of the people who are being sucked into the GameStop mania will discover this truism. When the music stops, someone is going to get hurt. In my 40+ years of experience, I’ve seen this movie before, and it doesn’t end nicely. 

But this isn’t what today’s commentary is about. 

Economic Outlook – 2021 – Three Scenarios

I want to make the point that our economic outlook for 2021 remains very positive. The drivers that are creating our positive outlook are not market-driven factors, which are normally present coming out of a recession, but are primarily government policies that should lead to an upward push in gross domestic product (GDP) activity, the likes we haven’t seen in decades. 

This all sounds great, but the uncertainties surrounding our economic outlook are unusually large. The expected economic rebound is dependent on factors that are not normally in play, at least at this degree. From the development, delivery and acceptance of a vaccine, to extremely large governmental fiscal spending plans, to unheard-of monetary policies, our economic outlook relies on these unusual variables. In fact, these variables most likely will have longer “tails” than some would like to admit.    

Today we outline, along with our core economic outlook, two alternatives to our core view. One of these alternatives is positive while the other is not so much so. Many of the noted variables and timing were extracted from the Conference Board’s outlook. As such, these variables and the timing of the maturation of the cycle tend to be reflective of consensus thinking of various economic analysis. We tend to agree with this consensus, as history cannot act as a guide, since the COVID slowdown carries its own economic signature, one that is unique. 

When thinking of capital market movement, it is important to understand current expectations, as they are at least partially reflected in today’s capital market valuation levels. If economic outcomes vary from consensus view, be it positive or negative, asset valuations may eventually reflect that new consensus and reality. 

Core Outlook

Below are highlights of our core, or expected, economic outlook along with the variables driving those views, which I hope you’ll find useful.

  • Expected GDP growth: +4.5%. Expected inflation rate: +2.0%. Total nominal GDP growth: +6.5%.
  • New COVID-positive growth rate peaks in early 1Q21, with no widespread lockdown occurring.
  • Vaccines are deployed gradually in 1Q21, and are expected to accelerate in 2Q21. 
  • December 2020 stimulus package is fully deployed in 1Q21, with President Biden’s package most likely to be deployed in 2Q21.
  • Labor markets and consumption weaken slightly in 1Q21, but should rebound in 2Q21 with the vaccine deployment acceleration.
  • The political transition does not result in a hit to business or consumer confidence.
  • Federal Reserve monetary policies remain accommodative, with purchases tapering as economic momentum accelerates. Short-term rates remain at 0%; yield curve steepens.
  • Macro output returns to pre-pandemic levels in fall of 2021.

In reading the above, you will see that traditional supply/demand factors are not noted. Those issues should take care of themselves if the assumptions, or drivers, occur roughly as outlined. In this environment, nominal GDP growth should eclipse 6%, which is a rarity. Historically, corporate profit growth has been very strong when the economy has grown in excess of 4.5% on a “real” basis (data per Macrotrends and Federal Reserve Bank of St. Louis). 

Earnings Gains

Over the last 60 years, GDP growth has risen in excess of 4.5% in only 11 years, or 18% of the time. Corporate profits increased, on average, 15.1% during those years, while over the long term, S&P 500 profits have increased by about 7% per year. If our outlook for GDP growth of 4.5% is reasonable, history tells us that 2021 should go down as a very good year for profit growth rates.      

Cautious Outlook

What if some of the factors noted above don’t play out as expected? What if instead the scenarios below pan out. What impact might that have on overall economic activity? 

  • Expected GDP growth: +1.0%. Expected inflation rate: +1.0%. Total nominal GDP growth: +2.0%.
  • Large spike in COVID cases in 1Q21, with widespread lockdowns, perhaps driven by federal mandate.
  • Uneven distribution of vaccines drags on through much of the first, second and third quarters. 
  • New COVID strains frustrate efforts to fully reopen economy, which results in consumers remaining restrained. 
  • No additional fiscal stimulus occurs beyond the December 2020 bill. Political headwinds lead to continued stalemate in Washington. 
  • The employment markets remain stuck in the COVID mire. Consumption growth stalls, leading to a negative print of 1Q21 GDP growth. 
  • Very volatile political transition disrupts both business and consumer confidence. 
  • Federal Reserve remains in ultra-stimulative mode through most of the year.
  • Economic output remains at, or slightly lower than, pre-COVID levels throughout the year, as the economy remains in a recovery mode. 

In this cautious case, with GDP growth (nominal) growing by a very low 2% level, the economy risks “stall speed” growth, that is, the potential of falling back into recession would be real, which might result in consumer and business restraint. 

Bullish Outlook

We have been hearing of many Wall Street firms broadcasting expected 6%+ real GDP growth rates for 2021. It has been rare for the U.S. economy to grow by that elevated level over a 12-month period. While possible, we think the following would need to unfold throughout 2021 for our economy to grow by this level. 

  • Expected GDP growth: +6.0%. Expected inflation rate: +2.5%. Total nominal GDP growth: 8.5%.
  • COVID cases fall dramatically by the end of 1Q21 and social distancing policies loosen. 
  • Vaccines are deployed rapidly in 1Q21, and become universally available/accepted in early 2Q21.
  • The December 2020 stimulus package is fully deployed in 1Q21. 
  • President Biden’s rescue package is rolled out in late 1Q21. 
  • A strong rebound in consumption and employment occurs by late 1Q21. 
  • The political transition does not result in a hit to consumer or business confidence levels. 
  • Federal Reserve policies are altered, with a tapering of bond purchases occurring by the summer months, and purchases ending by the end of 2021. 
  • Demand for capital from businesses and consumers increases markedly.
  • Macro output of 2019 (full recovery) met by Spring of 2021, completely eliminating the output deficit COVID created.
  • Economy enters expansion phase by Summer, 2021.

We believe our core case will prove to be the highest probability of the outlined scenarios. Under this scenario, unemployment should fall to the 5% range, and corporate profits should rise. We stand by our view that, longer term, new structural risks will result due to the COVID transition actions, as government activity will prove to be more dominant in macro-economic trends than in the past. We include the probable negative ramifications that might accompany the ballooning deficit in that view. 

The economy’s recovery from the COVID-induced economic shutdown is obviously important. I hope today’s piece highlights that importance, and you find it helpful.


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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