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2021 economic forecast

In 2021, we expect to see robust economic growth and consumer spending, lower volatility in the financial markets along with lower-than-average returns and no new Federal Reserve activity.

Just Average

I’m sure many of us are glad to see the calendar pages turn. 2020 experienced an unprecedented economic event; yet in many other ways, it was just average.

In 2020, the economy witnessed one of the swiftest cycles seen in history. The contraction in the second quarter was truly unprecedented – the U.S. has not seen an economic contraction of that magnitude since the government started keeping records in 1947.

The good news is the 2020 recession didn’t last long. For the calendar year, we estimate the economy contracted by 3.5% which, believe it or not, is close to average in periods of recession.

Since WWI, the average economic contraction in a recession is 3.0%. The actual data is surprising, because this contraction surely didn’t feel average.

The financial markets have been telling a different story. Back in 2019, the financial markets had a stellar year. The S&P 500 posted a return of 31.2% – much higher than the 5-year average return of 11.7%. In fact, in 2019, most asset classes did better than their 5-year average.

Even though we witnessed an unprecedented downturn in the second quarter of 2020, the returns in the financial markets are above the 5-year average. Year-to-date, as of December 15:

  • The S&P 500’s (large caps) return is 16.3% and the 5-year average is 14.8%.
  • Small caps’ return is 18.9% and the 5-year average is 13.1%
  • Emerging markets’ return is 14.6% and the 5-year average is 12.9%.

2021 Forecast


In 2021, we expect robust economic growth; specifically, a 4.1% increase in real GDP, which is better than average.

The average real GDP after the Great Recession, from 2009 to 2019 (a period we call the Great Moderation), is 1.8%. 2021 will be much better than that for the following reasons:

1. The economy will still be in recovery mode.

As we have cited previously, history tells us it has taken two years to recover from material economic events. Following are the U.S. total GDP numbers (total economic activity, annualized):

a. Fourth quarter, 2019 – $21.747 trillion

b. First quarter, 2020 – $21.520 trillion

c. Second quarter 2020 – $19.520 trillion

d. Third quarter 2020 – $21.157 trillion

e. Fourth quarter 2020- $21.400 trillion (estimate)

You can see that we are still in recovery mode, with total GDP lower than that seen in 2019. Given our forecast of 4.1% real GDP growth in 2021, total GDP will be $22.3 trillion at the end of the year, passing the GDP high-water mark set back in 2019.

At the beginning of the crisis, historical evidence suggested it would take two years to recover, and lo and behold, it looks like it will be average, as we forecasted.

2. 2021 may go down in the history books as the year the world beat the COVID-19 virus.

Even though we will enter the year with spiking cases and new restrictions on activity, vaccines are being broadly distributed. Pent-up demand along with a high savings rate will boost consumption beginning in the second quarter of 2021.

3. Stimulus will continue to drive economic activity.

It’s amazing what $5 trillion can do to an economy. The CARES act, passed in March 2020, gave the economy a $2.2 trillion crutch. A second $900 billion stimulus program (4.3% of GDP) will support consumption and economic growth in 2021, if approved. Regardless, President Elect Biden supports more stimulus if required.

Due to COVID-19, vacations were canceled, we couldn’t go the to the movies – in general, discretionary spending was curbed. That resulted in an additional $1.3 trillion of savings, just waiting to support consumption in 2021.

4. Monetary policy remains accommodative.

The Federal Reserve (Fed) has demonstrated that it is willing to support financial markets regardless of the disruption. The Fed has telegraphed its intentions to keep rates close to zero for as long as needed to get the economy back on track and indicated three factors that will influence its decision to change interest rates:

a. An average inflation rate above 2% for some time.

b. Maximum employment. An unemployment rate below the estimated natural level (NAIRU) may not be a signal of looming inflation. We think NAIRU is 4.0% so we have a long way to go.

c. Meeting both longer-term goals mentioned and ensuring their sustainability.

Therefore, we see no change in Fed policy in 2021.

Financial Markets


Economic growth, stimulus and accommodative financial conditions will all be part of the formula driving corporate earnings. We expect earnings to grow 25% in 2021 and most equity markets will post positive returns.

However, much of this may be already priced into the market and, as previously mentioned, due to above average returns over the last two years, we do expect 2021 returns to be modest, in the 7-10% range, below the five-year average. We expect the S&P 500 to end the year between 3,950 and 4,100.

There are many tailwinds supporting stock prices. Low interest rates and the need to optimize profits will drive merger and acquisition activity. This may keep valuations a bit frothy.

Banks and credit are the lifeblood of the economy. In late 2020, the Fed allowed banks to buy back stock. This will provide more fuel for the equity fire, increasing the relative attractiveness of risk-based assets.

Of course, risks remain. The COVID-19 virus remains a risk, as perhaps we’re not able to control it as hoped. Another risk is whether the Fed changes its guidance on the balance sheet or interest rates, just like in 2013, when we saw a “Taper Tantrum” and the equity market debacle. This could happen late in 2021 or in 2022.

Fixed Income

In 2021, the Fed will control the entire yield curve, keeping short-term interest rates unchanged through out the year and if necessary, keeping a cap on longer rates by buying longer-dated securities.

This would keep the yield of the 10-year Treasury in check. Short-term rates will remain at 0.25% and the 10-year Treasury yield will move modestly higher to close the year at 1.25%.

Much of the economic momentum that was building in the second half of 2020 will continue into 2021. Economic growth will remain above average as we return to a state of normalcy. We expect GDP to be in the 3.8% to 4.3% range in 2021.

Risk-based assets are expected to produce positive returns, yet lower than the 5 and 10-year average. Our S&P 500 target at end the year is between 3,950 and 4,100. We do expect to see volatility in the equity markets.

A new administration with a new agenda enters the White House in January, which may cause some short-term uncertainty. And given the strong performance of the market over the past nine months, a correction would be normal and healthy.

Interest rates are expected to be stable as the economy recovers. We don’t expect inflation to be a threat in 2021.

There is light at the end of the tunnel, but right now, we are still in the tunnel.

KC Mathews, CFA, is a Chief Investment Officer at UMB.

2020 hindsight: five lessons as we begin 2021

While many companies are still dealing with the acute impacts of the economic and social disruption of 2020, the Leeds Business Confidence Index indicates Colorado business leaders are confident the state will continue to outperform the national outlook in the first quarter of 2021.

Innovative companies can apply what they’ve learned this past year to excel in the months ahead.

Here are five ways that companies can build resilience, and weather future challenges, while being better positioned to capitalize on emerging opportunities.

Make cybersecurity a business-critical priority

You have seen the headlines and cybercrime is more of a risk in today’s remote work environment, so companies must prepare. Criminals realize that workers are less protected when working remotely and are launching malware campaigns targeting people with insufficiently secured devices. To reduce vulnerable attack surfaces in your company, look to strengthen mobile device management, ensuring security tools and protocols are in place.

Companies should also update and enforce a security policy for remote connectivity. Policies should provide guidelines on the safe use of public Wi-Fi, prohibit workers from transmitting sensitive information and require the use of VPNs and well-protected home routers. Finally, cybersecurity training can teach employees how to put essential safeguards in place while keeping cybersecurity top of mind across the company.

Financial discipline isn’t just for hard times

A thorough, proactive review of internal processes and key relationships can help protect your company. For example, cash flow issues are a common source of business failure, so it’s important to examine your supply chain and customer base for vulnerabilities that could impact your business.

Cutting expenses in a defensive and reactive posture can have unintended consequences. Instead, create “what if” scenarios now and plan allocations for each. If the time comes, you can respond with a thoroughly vetted plan.

Don’t let uncertainty deter you from growth

The Mergers and Acquisitions (M&A) market shifted in 2020 due to the impact of the coronavirus and widespread digital transformation. Companies with strong working capital and cash reserves could have a significant opportunity to put that to work through a merger or acquisition, especially if they have limited debt.

If your company is not in a position to pursue M&A activity, develop a strategic plan for future growth. Start by identifying the top opportunities facing your company right now, whether it’s market expansion, reaching a new customer segment or digitizing more of your business model. Consider potential hurdles you’ll face in pursuing these opportunities as it will help you formulate an actionable, prioritized plan specific to your situation.

ESG strategy is no longer just for the big guys

Focus on environmental social and governance (ESG) is far from a feel-good, concessionary strategy – it creates a culture of responsibility, sustainability and innovation and can be directly linked to a company’s long-term outlook.

Best practices for strengthening your company’s ESG commitments include disclosing comprehensive ESG information, and helping investors understand how to interpret it, having a diversity and inclusion program, and ensuring diverse representation on the board of directors, particularly as a strategy for attracting top talent. Employers surveyed in our 2020 Workplace Benefits Report cite diversity and inclusion programs as essential for retaining talent (73 percent) and something that builds a strong company culture (76 percent).

Along with the social benefits these actions bring, looking out for the good of society is good for companies, too. During the market fall in March 2020, $8.2 billion was pulled out of equity ETFs while ESG funds tracked by BofA Global Research continued to attract inflows, suggesting that fund managers faced less pressure to sell stocks with strong ESG characteristics.

Invest in your employees

Just as you’re taking steps to safeguard cash flow and business operations, it’s essential to protect the wellbeing of your employees. Management should support employees even more holistically and proactively than before. Leaders can schedule more frequent communications with staff and play an active role in broader wellness areas like financial stability and mental health.

Comprehensive wellness programs that support employees’ physical, mental and financial health are more important than ever today. The percentage of employees who rate their financial wellness as good or excellent declined from 61 percent in 2018 to 49 percent in 2020, and as many as 57 percent of employees feel their well-being has a great impact on their productivity, which could have major ripple effects on a company’s health. Financial wellness tools and education should cover a range of needs including saving for retirement, planning for healthcare costs, budgeting, saving for college and managing debt.

Coronavirus created unprecedented challenges for companies, and executives bravely faced new trials. While no one can predict what’s to come in the remaining months of 2021, these lessons from 2020 can help companies reignite growth and plan for financial success this year.

Raju Patel New Headshot Raju Patel is the Senior Vice President and Market Executive of Global Commercial Banking and Denver Market President for Bank of America.