'The recession is effectively over': Experts give 3 economic predictions for the rest of 2021

"It's hard not to imagine an economy that's on fire later this year."


With Congress set to pass a $1.9 trillion Covid-19 relief bill and the U.S. ramping up its vaccine distribution efforts, many Americans are beginning to feel optimistic that the pandemic — and the associated restrictions on the way people live — may soon be coming to an end. Some of the rosiest views come from financial analysts, who say that economic stimulus, vaccine availability, and a marked uptick in corporate earnings add up to an economy that should show prodigious growth through the end of the year.

"It's hard not to imagine an economy that's on fire later this year," Michael Wilson, an equity strategist at Morgan Stanley, said in a recent note. "In short, the recession is effectively over."

What does that mean? Technically, it means that the economy has been steadily expanding after U.S. economic growth shrank for two consecutive quarters in the first half of 2020 — the standard definition of a recession. Practically, an improving economy will have an impact on investors and workers alike.

Here are three major themes that experts see playing out this year.

Stocks may struggle in the short term

After months of prices trending upward, stocks have bounced around a bit of late. The S&P 500, a barometer for the broad U.S. stock market, was down 3% from its all-time high early this week before staging a comeback, and technology stocks have been even more volatile. The tech-heavy Nasdaq Composite index hit correction territory, defined as a 10% decline from recent index highs, on Monday, before staging a 4% comeback on Tuesday.

Experts say that expectations for an improving economy have dinged stocks in a roundabout way: by driving up long-term bond yields. Investors encouraged by an improving economy sell Treasurys, the thinking goes, because they have less need for the safety of holding a government-backed bond. Because bond prices and yields move in opposite directions, a sell-off in Treasurys means a boost in rates.

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Yields on 10-year Treasurys have climbed rapidly of late, from 1.09% at the end of January to 1.60% on Monday. Rising rates pose a threat to stocks — especially fast-growing tech firms, who have benefited from a prolonged period of dirt-cheap borrowing. The move in 10-year rates "has awoken investors to a risk they thought was unlikely, if not impossible," Wilson wrote in his note. The correction "has further to go before it's over," he added.

Short-term volatility in the stock market shouldn't trouble long-term investors, says Sam Stovall, chief investment strategist at CFRA. "You have to realize that the market goes through a pullback of 5% to 10% about once every nine months, on average," he recently told Grow. "There's always a possibility that we can fall into a pothole. Then the question is, 'What do I do about it?' Your best bet is probably ignoring it."

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Stocks will benefit overall, with new types of companies taking the lead

Value investing, a style of investing championed by Warren Buffett, was all but forgotten in recent years. But an improving economy means that investing in steady-growing, undervalued companies — rather than buying the market's highest flyers — may be coming back into fashion.

Over the last decade, fast-growing companies in the S&P 500 returned an annualized 16%, compared with an 11% gain in value stocks. So far this year, however, value has nosed in front, returning 7% compared with a 1.6% loss among growth stocks.

A growing economy, economic stimulus, and rising corporate earnings all bode well overall for stock prices for the rest of the year. But investors are betting that growth among tech and communications giants — companies whose products and services became even more essential under lockdown conditions — will slow as the economy continues to open up.

With many growth stocks still trading at expensive valuations, analysts at Barclays see value stocks continuing to play catch up in 2021 with fast-growers, such as tech stocks, lagging.

Analysts expect so-called cyclical industries to deliver outperformance as well. These businesses, which include financial firms, real estate companies, and sellers of nonessential consumer items, all typically do well during eras of economic expansion.

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All in all, Goldman Sachs analysts expect the bull market to continue through 2021, with value and cyclical stocks bouncing back and the sky-high prices of hypergrowth stocks coming back to earth. "Growth stocks can rejoin the party once the valuation correction and repositioning is finished," they wrote in a recent report.

Investors with diversified portfolios should hold a mix of stocks in different sectors, as well as a mix of growth and value names. There's no need to sell out of your growth stocks in anticipation of a value renaissance. But if the growth-stock portion of your portfolio vastly exceeds your value sleeve — as may be the case after a long period of outperformance among growth stocks — it may be time to rebalance your holdings.  

Employment will shoot up

Analysts at Goldman Sachs expect a rapidly improving economy to lead to a surge in hiring in 2021. They expect U.S. unemployment to hit 4.1% by year-end, down from the current rate of 6.2%. Driving the growth: business reopenings, fiscal stimulus, and people's pent-up desire to use their savings to shop.

A sharp February increase in hiring in the pandemic-ravaged leisure and hospitality industries should serve as a roadmap for what things will look like as the post-pandemic economy opens up, they say. "Two-thirds of the remaining pandemic job losses are in highly virus-sensitive sectors," they wrote in a recent note. Those include jobs in retail, restaurants and bars, air travel, and health care.

Job losses since February 2020
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Note: Seasonally adjusted data as of February 2021.
kiersten schmidt/grow Bureau of Labor Statistics

"We expect quick job gains in these industries and a much quicker recovery in employment relative to previous cycles," they add.

If you're looking for work, position yourself for success by taking steps to make yourself more attractive to potential employers who will be looking to hire in the coming months. Measures experts recommend include cleaning up your online reputation, honing a sharp elevator pitch, and keeping tabs on postings to increase the chances that you're among the first applicants to a particular position.

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