Looking forward to 2021
The new year revives old optimism.
About the same time last year, I was explaining why I was optimistic about the future. Twelve months later, I feel the same way. We can’t, of course, get a mulligan on 2020. The loss of lives and livelihoods due to Covid-19 was devastating and will continue into 2021. But there are positive developments and reasons for at least cautious optimism.
The obvious one is the arrival of vaccines, which have come sooner than many thought possible. The rollout will take time, but we also likely will see the number of new infections decline.
Less clear is the performance of the economy, but I am optimistic here, too. Let’s not forget we entered 2020 in reasonable shape, with interest rates and inflation at around 2%, and GDP growth in the 3-4% range. Headwinds, such as trade wars and Brexit, have passed.
It will take time for the U.S. to recover from the coronavirus-induced damage. But the economy is on its feet now, and with vaccines it should start taking strides. We think pent-up demand will play a major role. As people feel more confident about their finances or return to work if they were laid off, economic activity should arise. Consumers can only buy so much from Amazon. They will return to local stores, take trips, enjoy live entertainment and buy big-ticket items. And there’s little indication that well-performing sectors, such as housing, will roll over.
Even the Federal Reserve’s outlook has gotten rosier. The projections from its December meeting are for a decline in GDP by 2.4% in 2020 and a growth of 4.2% in 2021, compared to its forecasts of 3.7% and 4%, respectively, in September. Same goes for the labor market. Policymakers now envision an unemployment rate of 6.7% in 2020 versus their September call of 7.6%. Both changes came with the full knowledge of the resurgence of the virus. The Fed is less enthusiastic about inflation, still not seeing it hit that vaunted 2% level until the end of 2023.
What else might 2021 bring? Even if the U.S. Treasury primarily funds Congress’ $900 billion stimulus package with longer securities, we expect enough Treasury bills to push the short end of the curve higher. The money markets probably will continue to see outflows. This reflects low yields, of course, which are driving some investors to longer-duration options such as ultrashorts. But some migration has been due to businesses deploying funds back into operations and people taking cash to the equity market after being on the sideline.
There’s also potential for regulatory discussions, shifts in tax laws, market volatility, Libor/SOFR bumps in the road and leadership changes in agencies, institutions and more. One positive for the latter is Janet Yellen becoming Secretary of the Treasury (Senate approval should be swift). Say goodbye to the Trump administration’s inappropriate attacks on the Fed—and not just because Chair Jerome Powell has a close relationship with Yellen from her time in that seat. They will have open dialogue with mutual respect and likely mutual leanings (dovish). Yellen’s expert knowledge of the mechanisms and the tools the Fed has at its disposal will help to inform her own decision-making and advice she gives to the White House. The same goes with new Fed governor Christopher Waller, who knows the ropes after years at the St. Louis Fed.
We kept the weighted average maturities of our money market funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal.