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Schwab's Sonders, Kleintop Predict Weak Start for Economy in 2021

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Graphic for predictions in 2021 with stock chart (Image: Chris Nicholls/ALM, Shutterstock)

The U.S. economy will likely continue to suffer from pandemic-related issues in early 2021, but growth is expected in the back half of the year thanks in part to COVID-19 vaccines making their way to more Americans, according to Charles Schwab strategists.

Related: Vaccine Hopes Spark Fund Managers’ Optimism: BofA

“Unfortunately, in the near term, we are seeing weakening activity by virtue of the virus, even” in U.S. locations “where we haven’t had any kind of mandated lockdowns,” Liz Ann Sonders, senior vice president and chief investment strategist at the firm, said Thursday during a Schwab 2021 Market Outlook call with reporters.

The firm’s general consensus forecast is that we will see “near-term weakness over the next quarter or two tied to the virus and then a pickup in growth thereafter,” she said.

While there is “a lot of discussion about pent-up demand” among U.S. consumers that stands to help the economy, “I think the pent-up demand may have been met for the most part once the lockdowns ended on the good side of the economy,” she said.

However, “given the still-beleaguered state of services and the lack of desire to utilize a lot of services — certainly in the travel, leisure and hospitality area — I think that’s probably where we’ll see the bigger improvement from a pent-up demand perspective once we’re back in a more normal economic environment,” she told reporters.

What we are seeing is “widespread optimism right now, suggesting that a lot of really good news is priced in” to the market already, she said. That means there is a risk because “if we get something outside of this positive consensus, it could trigger a bit of a contraction.”

Longer-Term Pandemic Risks

There is potentially “positive and negative longer-term impact” related to the pandemic, even after it ends, according to Sonders.

“I think we have to keep a close eye on not just” broad labor market data, but “specifically some of the measurements that suggest” we may be seeing a potential “scarring effect” like what is traditionally seen after a major recession or other economic crisis, she said.

Data to keep an eye on includes the duration of unemployment and the percentage of people who have been unemployed more than 27 weeks, Sonders said.

Such “scarring tends to suggest that it becomes increasingly more difficult for those folks to find jobs,” she told reporters. There is probably less of a “stigma” to being out of work for so long this time because everybody chalks it up to the pandemic, she noted.

“But there’s also a higher likelihood that those folks dropped out of the labor force altogether. And tied to that would be permanent job losses,” she said.

While we have “seen a huge decline in temporary layoffs,” Sonders said, “that’s because most of the payroll gains have been people getting their old jobs back.”

Global Perspective

As 2020 closes, “global economic momentum is fading,” according to Jeffrey Kleintop, senior vice president and chief global investment strategist at Schwab.

However, “the good news is the economy globally has the potential to make a full recovery next year, rebounding from” the International Monetary Fund’s projected 4.4% GDP decline for 2020, with growth of 5.2% expected for 2021, he noted.

If the IMF’s projection comes true for 2021, that would bring us to “about 6/10 of a percent above where we ended 2019 — so a full recovery,” Kleintop noted.

“A combination of easy monetary policy and fiscal policy combined with a successful vaccine rollout beginning in the first half should lead to a pretty strong rise in economic and earnings growth — especially in Europe,” which is quite different from what we’ve seen in any outlook over the past decade or so, he pointed out.

“2021 may see the U.S. pass the baton of global growth leadership to Europe,” he told reporters, pointing to IMF’s projection for 5.2% GDP growth in Europe versus 3.1% for the U.S.

We will probably also see more lockdowns in the first half of 2021 in certain countries, but the situation should improve after the vaccines become more widely available and the weather gets warmer in spring, he predicted.

There are still risks beyond COVID, he said — there are the typical risks that accompany any new year, and also economic and geopolitical risks.

“There are a lot of things we’re going to have to keep our eyes on,” including elections and “the aftermath of the bailouts and the stimulus as that begins to fade,” he warned.

In the U.S., although it is still too soon to say which political party will control the Senate next year, Sonders said the Jan. 5 runoffs in Georgia “could be a negative market event.”

However, “we don’t think it means an ushering in of some of the more extreme policies that were part of” Joe Biden’s presidential campaign platform, including “major tax increases,” she said.

“I think the ability to get that done will still be tempered by not just the tie in the Senate, but some fairly moderate voices on the Democrats’ side,” Sonders added.

Investing Tips for 2021

Sonders suggests taking a “hybrid approach” to investing. This means having a “combination of growth characteristics and value fundamentals when looking for stocks, [having] that quality overlay, and don’t necessarily feel like you have to make a sector-based decision or a style-based decision,” she noted. “Combining factors into that analysis will be the winning strategy.”

Kleintop’s main investment suggestion was simple: “Avoid doing nothing. I think most investors have let their portfolios drift towards U.S. equities” and it is time to rebalance now, he said.

He also warned that the gap between alternative and traditional energy stocks is “likely to continue to close, maybe to the benefit of traditional energy stocks,” so he suggested investors “watch out with those very heavy green bets in portfolios that were put on as we led up to the election — I think they may continue to unwind.”

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