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January Special Edition: 10 for 2021

MARKET PULSE | January Special Edition: 10 for 2021


Economic Growth

Policy expansion, vaccine availability, and geopolitical clarity should set the foundation for a 6.5% global recovery and 6.4% US recovery in 2021. While virus seasonality may pose a risk, we believe an absence of financial imbalances may unlock a quick cyclical rebound upon mass immunization by 2021 YE.


We believe a multi-year growth acceleration is required to normalize unemployment rates. By 2021 YE, we estimate unemployment rates to decline to 4.8% and 9.9% for the US and the Euro area. Business re-opening may gradually reduce labor market slack, though lingering structural unemployment may cap wage and price inflation.


Cyclical recovery has replaced a large US fiscal package as the primary driver of US reflation. Prices may firm up significantly in COVID-sensitive sectors, but are unlikely to sustain central bank inflation targets across DM markets. Our Q4 2021 forecasts for US and Euro area core inflation are 1.8% and 0.8%, respectively.

Monetary Policy

Fed guidance has made >2% inflation a prerequisite for policy liftoff. Given this greater appetite for an inflation overshoot under the average inflation targeting framework, we expect the funds rate to remain at the zero-bound through 2023. Other DM policymakers will likely stay accommodative to help aid the recovery.


While a blue wave appears likely, slim margins should moderate policy outcomes. We expect reconciliation to remain a legislative path for the President-elect’s fiscal agenda. In Europe, a “thin” Brexit deal has been agreed upon, but the EU-UK relationship may be subject to the evolving preferences of future administrations.


The early stages of the next bull market expansion are likely to see equity returns pulled forward given policy support, vaccine prospects, and economic re-opening. We believe secular trends will continue to reinforce growth themes, but the recovery may promote tactical outperformance from value and non-US equities.


We expect steeper yield curves as policymakers commit to keeping front-end rates low, but improving growth and inflation outlooks drive long-end rates higher. Weak inflation may limit upside internationally, but more negative policy rates are less likely.


Strong growth and continued policy support will allow defaults and spreads to further normalize in 2021 (US IG: 100 bps, US HY: 340 bps). The combination of anchored yields and easing volatility premium should also reinforce “down-in-quality” themes, particularly if more bullish cyclical and commodity trends extend.


The US dollar may continue to weaken given high valuations, deeply negative US real rates, and a recovery of global growth. We expect US dollar downside to broaden, with potential underperformance versus G10 and EM FX.


We expect episodic market volatility to continue as we navigate the recovery. We believe that moments of tactical uncertainty are best addressed with strategic design and discipline.

Hindsight is 2020

A lookback at 2020 reminds us that a recession may be catalyzed by non-traditional drivers, swift and sizeable policy response can be effective, and markets have remained resilient in the face of a worldwide pandemic. Though the effects of COVID-19
are not yet behind us, we expect a smoother economic and market path moving forward.

~95% of global economies were placed under lockdown at the pandemic’s peak. Though there has been progress on reopening, the US economy remains at 67% of pre-pandemic levels.
Although it reached 191 countries in 11 short months, the fatality rate from COVID-19 reflects the 8th highest across major viruses over the last 50 years.
The first COVID-19 FDA-approved vaccine had a start-to-end development life cycle of only nine months, a record feat compared to the usual decade-long investment in vaccine research and production.
Developers’ projection suggests that vaccine supply may exceed the world population by 2021.
92% of advanced and developing economies fell into a recession in 2020, the greatest synchronized downturn since 1870.
The pandemic’s first wave led to 25 million US layoffs and headline unemployment spiked to 14.7%. Globally, labor income fell by 17.3%, which is equivalent to losing 495 million full-time jobs.
Low rates and suburbanization have led US mortgage origination volume near its all-time peak, estimated at $3.6 trillion. Mortgage refinancing may exist for 50% of outstanding 30-year borrowers in 2021.
E-commerce as a share of total US retail sales climbed to 16%, increasing as much in the last year as it did over the past ten years. Major Asian economies have seen penetration rates surge above 30%.
2020 had a unique bear market: 1) the VIX index rose to an all-time high of 87, 2) the S&P 500 fell -34% in just 22 days, and 3) a swift 5-month recovery paved the way for a new bull market cycle.
The top five companies in the S&P 500 have grown to 22% of US equity market capitalization. They have returned 49% in 2020, while the remaining companies gained only 9%.
Median US corporate credit spreads spiked to ~450 bps in March. Monetary intervention helped normalize spreads, but the stockpile of negative yielding debt has grown $7 trillion since 2019.
WTI oil futures closed negative for the first time in history in April given storage capacity constraints, while pandemic uncertainty led gold prices to its all-time high of $2,064 per troy oz.
Coordinated fiscal policy response has amounted to $8.6 trillion deployed across G10 countries, or 6% of global GDP. Still, US interest expense as a percent of GDP sits at a six-decade low.
67% of eligible Americans voted in 2020, the highest turnout in 120 years, delivering a mandate of compromise in Washington.
Clarity on Brexit and US elections may lower policy uncertainty from near-record highs, but a Biden administration will prioritize foreign policy, this time with a multilateral focus on China.
China is on pace to purchase 53% of the $200 billion in US goods as part of the Phase 1 trade deal.

Top section notes: Goldman Sachs Global Investment Research and GSAM as of January 2021. Past performance does not guarantee future results, which may vary. Bottom section notes: IMF, John Hopkins, World Economic Forum, International Labor Organization, Mortgage Bankers Association, NYTimes, US Census, Statista, Haver, Bloomberg, Federal Reserve, PIIE, Goldman Sachs Global Investment Research, and GSAM. As of December 2020, latest available. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 

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