A Boom in 2021… But What Could Make It Bust?

2021 to be a boom year. People are already more risk-tolerant of Covid-19, and vaccines will make them more so. Eager to re-engage economically and socially, a surge of pent-up demand will be fueled by record savings thanks to foregone consumption and now two rounds of stimulus. We expect at least one of the two GOP candidates will win in Georgia tomorrow, but if both lose, Democrat control of the Senate would change the market’s present optimistic calculus of policy risk. The most certain negative is imposition of higher corporate tax rates that would reduce after-tax S&P 500 earnings by 12% and punish CAPEX, and the treatment of dividends and capital gains as ordinary income. Restoration of deductibility of state and local taxes would be a partial offset. A consumption boom will lead to temporarily higher prices, but this should not permanently shift inflation expectations too far upward, nor cause the Fed to mistakenly tighten. Yields will rise, but this will be a symptom of growth, not a penalty on growth, as has been the case historically. Biden won’t repeal Trump’s tariffs on Chinese imports, but markets will enjoy the confidence that they are free of sudden disruptions arising from aggressive and unpredictable trade initiatives. China and North Korea may test Biden’s strength with some form of adventurism. Iran is signaling a willingness to restart the Obama-era nuclear deal, and putting pressure on Biden by more aggressive steps toward nuclearization. Europe, Israel and Arab states are not on board without modifications. If the deal is restarted and sanctions are lifted, 2 million barrels per day of Iranian oil would flood an already glutted crude market, and prices would fall to levels that would risk recession in the US.