As markets and society consign 2020 to the history books, economists cautiously optimistic on the outlook for 2021 warn that the dominant theme of last year — the COVID-19 pandemic — will not disappear.
In fact, the biggest potential upside to financial markets — an effective, mass-produced and distributed vaccine — could also be the biggest potential downside if they fail in one way or another to thwart the spread of the virus.
"If the vaccines fail, we're in the soup," said Nathan Sheets, Newark, N.J.-based chief economist and head of global macroeconomic research at PGIM Fixed Income. "Then (there is a) risk around distribution, and will people take it. Another important issue is distribution into emerging markets — that's dependent particularly on the AstraZeneca vaccine."
The coronavirus pandemic and subsequent shutdowns by countries across the globe to try to control its spread influenced monetary and fiscal policy in unprecedented ways. Central banks cut rates to ever-lower figures and ranges, expanded bond-buying programs and, in the case of the European Central Bank, brought together members states of the European Union to create a pandemic emergency purchase program worth more than $2 trillion. Governments around the world also embarked on job retention programs and packages to keep businesses going and unemployment in check. The U.S. Coronavirus Aid, Relief, and Economic Security Act amounted to about 15% of U.S. GDP, compared with the 5% the 2009 stimulus package produced to combat the effects of the 2008-2009 global financial crisis.
On Dec. 28, President Donald Trump signed into law a second coronavirus stimulus package, amounting to $900 billion.
And as the realities of a global pandemic set in and markets plummeted in March — with the S&P 500 index down almost 35% on March 23 — markets subsequently responded well to stimulus shots. For the calendar year, the S&P 500 index returned 18.39% vs. 31.5% in 2019, while the MSCI ACWI gained 16.83% vs. 26.6% last year.
The general consensus among money management economists is that 2021 will bring a "strong economic recovery … as vaccines are rolled out and the reopening of economies is more complete," said David Riley, chief investment strategist at BlueBay Asset Management LLP, London.
But a relatively bullish view means "there's more focus on downside risks. And (they) relate to how quickly the vaccine is rolled out and we get to the point where we can have a full reopening."
It was also the consensus view that the effectiveness of vaccines could exceed expectations.
"It means that the percent of the population that you need to vaccinate in order to get to herd immunity … is that much less and can happen that much earlier," with potentially a full reopening by the summer, Mr. Riley said.
However, "if that rollout has meaningful delays so we don't get herd immunity or full reopening until the third or fourth quarter even, that's a downside risk. It's still an economic recovery, but weaker than would be the case. And (for) the most-hit COVID sectors where there is some value for investors willing to take on that risk, some of those businesses won't survive," Mr. Riley warned.