According to the markets, the economic outlook for 2021 is a good one. They’re telling us the economy is getting back on track and will enjoy strong growth in the months ahead.
For some people, that might be a bold prediction. Others may think the bar is set very low. All I can tell you is this: The stock market is the best predictor of future economic activity. It has rarely, if ever, failed.
There are exceptions. Markets took a nasty turn south last spring as covid-19 started to spread like wildfire around the globe. The economy buckled under. GDP dropped a record-breaking 34% in the first quarter before rebounding by 32% the next quarter (also a record breaker).
Shocks like this happen, and there is no way for the markets to predict them. It’s how we adjust to those shocks that says the most about how the economy may recover.
The economic outlook for 2021
So why do I think the markets are telling us good times are coming? The stock market discounts prices about six to eight months in advance. Hence, we can draw a conclusion that today’s market action is predicting a strong economy around May or June 2021.
Remember, stock prices today do not reflect the news of the day. Rather, they reflect trends in future earnings and growth. Hence, when a company reports strong earnings and the stock price rises sharply, markets expect that the acceleration in earnings will continue. This is exactly what happened with Target during the last two quarters. Take a look at the chart here, and you’ll see steady movement up and to the right.
With the stock market indices at or near all-time highs, it is not unreasonable to believe the economic outlook for 2021 is bullish. It is likely markets will get to an overbought condition, so keep that in mind. However, we are entering a seasonally strong period, so there is plenty of wind in the bulls’ sails.
