I’ve read many projections about what will happen in 2021. I’ve even made a few myself.
My advice is to take all of them with a large grain of salt. No one can truly predict what will happen in the months ahead. Rather than be seduced by rosy forecasts (which many of them are), I suggest you watch specific trends. They’ll provide useful clues as to where the economy is going and how your investments are likely to perform.
Here are some that I’m focusing on.
- Pace of vaccine rollout. We will never attain full economic recovery until the coronavirus is under control. And that won’t happen until a large percentage of the population is vaccinated — some public health experts put that figure at 70 per cent. So far, the rollout has been disappointingly slow in most countries (only Israel seems to have figured it out).
At the current rate it will be next fall or even 2022 before we achieve anything like the mass immunity we need. Unless there is a dramatic improvement in the distribution process, the economy is likely to languish for months to come as lockdowns continue.
- Unemployment. Canada’s unemployment rate stood at 8.6 per cent in December and the underlying news was not good. Employment fell by 63,000 in the month — the first decline since April, according to Statistics Canada. A total of 1.1 million workers were affected by COVID-19 economic shutdowns.
Unemployment is a key measure of the underlying health of the economy and it’s a number central bankers and politicians watch closely. It’s discouraging that, after seeing a steady decline all summer, the December number rose. The next two months will tell us if that was a blip or the start of a new trend. If the numbers of those out of work continues to rise, expect a much longer road to economic recovery.
- Inflation. This is not a concern at this time. The annual rate of inflation is still very low — Statistics Canada reported last week it was just 0.7 per cent in December. Almost nonexistent.
But massive government spending programs are pouring billions of dollars into the pockets of individuals and corporations. That’s not going to end anytime soon; President Biden is asking Congress to pass a $ 1.9-trillion (U.S.) COVID relief package that would bail out cash-strapped companies and send $ 1,400 cheques to most Americans. In Canada, the federal Liberals have pledged to spend up to $ 100 billion over the next three years to help rebuild the economy. Finance Minister Chrystia Freeland has called it “the largest economic relief package for our country since the Second World War.”
Meanwhile, central banks are buying massive amounts of government bonds, effectively printing new money to do so. Bloomberg reported recently that the major central banks have poured $ 5.6 trillion (U.S.) into the global economy since last March.
At some point, all this free-flowing cash has to send the inflation numbers higher, which in turn will force the Bank of Canada and the Federal Reserve Board to decide whether to let it ride or raise rates and risk compromising growth. So far, they have said they will tolerate inflation beyond the previous two to three per cent target. It’s highly doubtful we’ll see that level this year — but 2022 could be a different story.
I’m going to watch this number closely. If it starts to rise significantly, it’s going to present major problems for the central bankers.
- China. Only one major country in the world reported economic growth in 2020. China announced this month that its GDP expanded by 2.3 per cent during the year, despite having suffered a disastrous first quarter decline of 6.8 per cent and massive tariffs imposed by the Trump administration.
There are two lessons to be drawn from this. The first is that, if the official numbers are correct, it is possible to achieve economic expansion even in the midst of a pandemic. The second is that, given the 2020 numbers, China will likely again lead the world in terms of growth in 2021. That would suggest investing in a high-quality ETF like the iShares Large Cap China ETF, which trades in New York under the symbol FXI. It been rising steadily for the past month and it up about 12 per cent in that time.
- MSCI USA All Cap Index. If you want to know how the overall U.S. stock market is doing, ignore the major indexes. The Dow is mainly composed of old-economy companies, the Nasdaq is overly exposed to high tech, and the S&P 500 is limited to large caps.
Rather, look at the performance of the little-known MSCI USA All Cap Index. Launched in 2010, it includes 3,443 stocks across large, mid, small, and micro capitalizations, representing about 99 per cent of the U.S. equity universe. It was ahead by 21.14 per cent in 2020. That was well ahead of the Dow and the S&P 500, but trailed Nasdaq, which was up 43.6 per cent for the year.
You can invest in this index through the Invesco PureBeta MSCI USA ETF, which trades under the symbol PBUS. It was up 21.71 per cent in 2020 and shows a three-year average annual rate of return of 14.98 per cent.
It’s going to be a difficult year for investors to navigate. But watching these trends closely should help improve your returns.