Midyear Outlook 2021: The Long and Winding Road Back to Normal

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The story of 2020 was just how far from normal we could get. We faced a pandemic with millions of cases and hundreds of thousands dead. Fear and government policy shut down the economy, keeping people at home and destroying businesses. Millions of people lost their jobs. From a certain perspective, it looked like a depression in the making. And it could have been. Fortunately, a combination of government stimulus programs and rapid vaccine development helped us survive economically and start to control the virus. We still ended the year in an abnormal state, not at all sure how—or whether—we would ever return to normal.

Halfway through 2021, the story has changed. We’ve seen much progress on both the medical and economic fronts. Vaccines have controlled the virus and brought new case growth down to pandemic lows. Millions of jobs have returned as the country has reopened. But as we enter the second half of the year, new problems have emerged: those of success. Labor and supply shortages, plus the shadow of inflation, are calling the recovery into question. The initial bounce back has been strong, but will we get back to normal by year-end?

All Signs Point to Yes

Based on what we know today, the answer is yes. Of course, medical risks remain—the virus is still out there. But its ability to cripple the economy looks to be played out, especially at a national level. At the moment, there is a disconnect between jobs and workers. Still, the workers are there, and those jobs will be filled. Supply chains also have some gaps, creating shortages and high prices. At the same time, suppliers are working hard to fill those gaps, and in some areas (lumber and copper, notably), supplies are already up and prices down. And with the labor market and business supply chains normalizing, inflation should pull back by year-end.

Despite the headlines, that pending normality is what’s driving markets. In fact, markets have reached new records throughout the year. Investors see the economy moving ahead, and corporate earnings have validated that positive outlook. They continue to grow by double digits, a trend that’s expected to persist through the end of the year. People are working and spending, and businesses are hiring and investing. This growing economy will likely lead to markets rising even further. We are in a virtuous recovery cycle here in the U.S. And as the rest of the world gets the virus under control, we may well benefit even further.

Bumps in the Road

Risks remain, of course. The Delta variant of the virus could lead to local outbreaks in areas with low vaccination rates. Even if that happens, though, a national outbreak looks unlikely. Further, the risk is dropping by the day as more people get vaccinated.

On the economic side, job growth could well slow. But there are millions of openings, and supplemental unemployment insurance will soon expire. Given that, slow job growth is likely to be a localized and solvable problem. Finally, markets have been trending higher but remain vulnerable to adverse events—which has always been the case. With an expanding economy and rising earnings, conditions remain favorable.

Tailwinds Ahead

Beyond the healthy and improving fundamentals, other tailwinds should keep the economy and markets moving. On the fiscal side, more governmental stimulus in the form of infrastructure spending is likely to start by year-end. This spending is sure to help growth. On the monetary side, the Federal Reserve has committed to keeping interest rates low at least through the end of 2021. Rather than slowing things down, the government will keep pushing the economy forward.

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