U.S. stocks reached all-time highs in 2020. The market’s rise illustrated dramatic differences between Wall Street and Main Street; the pain felt on Main Street included nearly 20 million reported coronavirus infections and 345,000 deaths, an estimated GDP decline of 3.5%, and about 11 million unemployed people in the U.S.
Expectations are for Wall Street and Main Street fortunes to be positively aligned by the second half of 2021, predicated on success in vaccinating much of the population. There are five considerations that investors should incorporate into 2021 investment planning:
1. COVID-19 vaccine and treatment progress will be a positive catalyst for markets, but the pandemic may not be contained for several months.
Near-term risks remain high, given the surge in COVID-19 cases and a disappointingly slow rollout of vaccines in much of the world. There are also unknown factors associated with newly developed vaccines, such as the length of protection provided by vaccines, whether vaccines prevent transmission of the virus, and the effectiveness of different vaccines against mutations of the virus. The latest surge in cases has been met with a slowdown in mobility measures and other high-frequency economic indicators.
A meaningful portion of the population should be vaccinated by midyear, leading to strong economic growth in the second half of the year. But until more of the world’s population is vaccinated, economic growth is likely to be inextricably tied to COVID-19 case counts and hospitalizations, contributing to elevated market volatility.
2. Centrists in the Senate may return to prominence.
With the slimmest of possible Democratic majorities in the Senate, President-elect Joe Biden will face constraints on his ability to enact legislative policy preferences. Biden will need support from centrist Senate Democrats, who are less likely to support the substantial tax increases and policy priorities favored by the progressive wing of the Democratic Party. Democratic and Republican centrists in the Senate may find common ground on additional pandemic relief and infrastructure spending in the early days of the Biden administration.
Some tax increases are likely, including increases in personal tax rates for individuals in the highest tax bracket and a partial reversal of the Trump corporate tax cuts. Given the slim Democratic majority in the Senate, tax increases should fall far short of the dramatic restructuring of the tax code proposed in Biden’s campaign platform.
3. U.S.-China relations will remain strained under Biden.
Biden’s approach to China is likely to be less confrontational than Trump’s “America First” approach, and he will seek support from European and other allies. Biden is more likely to recognize mutual dependency with China and the importance of Chinese revenue to American companies. He will be less focused on the U.S. trade deficit with China, which disappears once sales of subsidiaries of U.S. companies in China are included. Conflicts relating to Taiwan, technology and human rights are potential sources of friction that could create market volatility. China is here to stay, but investors are likely to welcome Biden’s more measured approach to geopolitics.
4. Equity market leadership is likely to rotate in 2021.
Market leadership rotated late last year from technology stocks to more cyclical value and small-cap stocks. “COVID-19-laggards,” including airline, hotel and energy stocks, may be the biggest winners from pent-up demand unleashed when lockdowns and social distancing are in the rearview mirror.