The unpredictable nature of the pandemic and vaccine rollout have complicated economic forecasting models in 2021. Consumer behavior is very difficult to predict, and corporations are reluctant to overcommit to earnings forecasts in 2021. Indeed, over the past six months, CEOs have been all over the map in statements about when the economy could normalize – some see strong rebound activity as soon as the spring, while others are pushing optimism out to 2022.
The bottom line for most executives is an obvious one: the full thrust of the economic rebound depends on how quickly we can reach mass immunization; which health experts say requires more than 70% of the population to develop immunity from Covid-19.1
There’s a reasonably long road ahead – as I write, under 10% of the U.S. population has received at least one dose of the vaccine, and a U.S. Census Bureau survey of 68,000 Americans found that some 50% were unsure about taking the vaccine at all. Even still, the pace of daily vaccine shots being administered continues improving by the day, and I expect it will continue to improve in the coming weeks and months.
So, what will the economic recovery look like in 2021? I’m looking at corporate earnings, consumer sentiment, and energy markets for clues.
Let’s start with earnings. Here at Zacks Investment Management, we keep a very close eye on corporate earnings, estimates, and statements. I mentioned earlier that CEOs have been all over the map in their outlooks, but in the most recent earnings-call transcripts, I’ve noticed a marked rebound in sentiment. Bank of America also uses transcripts to measure corporate sentiment among S&P 500 companies, and recent analysis found that sentiment in Q4 had risen to an all-time high. Corporations are ready to get back to normal, just like we are.
Corporate profits have also rebounded more quickly than expected over the past year. While full-year corporate earnings are likely to be greater than -10% in 2020, we’re expecting an over +20% jump in 2021. The relatively slow – but accelerating – vaccine rollout does not alter our outlook.
On the consumer sentiment front, we can see below that the University of Michigan’s index of consumer sentiment has rebounded off the lows, and appears poised to continue charting its recovery (the pandemic-driven recession shaded in yellow):
Source: Federal Reserve Bank of St. Louis2
A recent consumer expectations survey from the New York Federal Reserve also highlights growing strength. According to the NY Fed’s January Survey of Consumer Expectations, American households expect spending to be 4.2% higher a year from now, which underscores the belief there’s light at the end of this tunnel. Respondents also expected their incomes to be 2.4% higher, citing expectations for a strengthening jobs market.
Finally, the energy markets have shown signs of pricing an economic recovery sooner rather than later. The price of oil is determined by supply and demand, which I would argue are both supporting higher prices. Production cuts and inventory reductions have kept a check on supply, but demand is also rising as countries position to push growth forward in the second half of 2021. Brent crude futures are trading some 50% higher than where they were in October 2020, with the price for a barrel of oil pushing to $60 for the first time in over a year.
Bottom Line for Investors
Long-time readers of my column know I rarely bet against the United States’ ability to overcome adversity. The pandemic and now the vaccine rollout represent adversity #1 for the U.S. (and the world) in 2021, and I’m anticipating a better-than-expected outcome for a return to economic normalcy. I’m looking for corporate earnings growth greater than 20% year-over-year in 2021, and full year GDP growth of 5+%. In my view, owning quality stocks is the optimal way to capture this growth.