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What's ahead for the economy in 2021

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman discuss stock market action and 2021 outlook with Emily Roland, John Hancock Investment Management Co-Chief Investment Strategist.

Video Transcript

MYLES UDLAND: Let's talk a bit about some breaking economic news just out. That is some data on the manufacturing sector. The Institute for Supply Management out with its December reading on manufacturing output, up to 60.7. A reminder on these indices, anything over 50 indicates expansion. So this seeing the manufacturing sector expand at a faster rate in the final month of 2020.

Also in the subindexes here, prices paid rising to the highest since May 2018, 77.6. Again, same methodology there. And so certainly opening up for an interesting dynamic as we see, you know, those low inventory levels certainly get backfilled across the economy. Manufacturing a leading part of that trend.

And let's stay on the economy and the markets here. Bring in Emily Roland. She is the Co-Chief Investment Strategist at John Hancock Investment Management. So, Emily, let's start maybe with that idea of concerns about inflation and what it might do to yields in the year ahead. It's become a new hot talking point over the last couple of months. You know, what happens if we start to see a sustained rise in inflation? How are you thinking about that, and what are your expectations today for, you know, maybe what's going to happen at the longer end of the yield curve?

EMILY ROLAND: Yeah, thanks for the question. You know, investors have been positioning for higher inflation for a while here, actually probably for the best part of the last decade, and we failed to really see it materialize. And when we look forward, we expect inflationary pressures, frankly, to remain quite muted. We are seeing some signs right now if you look at things like 10-year break-even rates on TIPS. We're starting to see that rise above the 2% mark. That's the first time we've seen that since 2018.

So there are some mild inflationary pressures building, most likely from these COVID-related supply disruptions that are pulling forward demand. I think the ISM Manufacturing Index showing some signs of that happening.

But over time, there's still a number of factors that we think should continue to put downward pressure on inflation or at least keep it contained. You think about the huge amount of slack that remains in the labor market with 10 million Americans who had jobs back in February still out of work. The consumer, of course, represents 2/3 of the economy, so that's absolutely critical to get people back at work in order to generate some inflation here.

And while you have an increase in money supply or M2, we fail to see a circulation of that money. So the money is actually not being spent. And, in fact, the personal savings rate is at the highest rate it's been in almost 45 years.

So folks are saving that money. They're not out there spending it. And we still have a ways to go until this fragile jobs market shows signs of recovery.

BRIAN SOZZI: Emily, if the market has shown anything-- at least in the first, what, day and a half of trading or so, or not even a full day and a half-- is that it's willing-- maybe willing to react more to negative news on the vaccine and, at least in the short term, more of the election-related news with regards to the Georgia Senate runoff. Do you think it's time to fight that bullish market momentum that really started in December?

EMILY ROLAND: Listen, the market is priced for perfection right now. And if you think about the end of last year, everything is awesome. Markets are expecting you know, the vaccine rollout to happen seamlessly. Earnings estimates are expected to rise. Corporate earnings about 22% year over year heading into 2021.

And, you know we're very much encouraged by this positive economic data. We're very much encouraged by the great progress on the vaccine, and we do think that there's a light at the end of the tunnel by the back half of 2021, but we also think that we could be entering a bit of a rough patch over the next couple of quarters here. There's still key risks around the vaccine, around distribution, around possible mutations of the virus, which I think is really what's going to drive market.

So I think it's important right now to, you know, have a balance between exposure to parts of the market that are going to benefit from this sort of reflation idea but also to balance that with higher-quality asset, areas like technology and communication services, areas that are less sort of impacted by this reflation narrative-- the US in particular, emerging-market equities-- so to position for better long-term news but also some bumps along the road over the short term.

JULIE HYMAN: Hey, Emily. It's Julie here. Happy New Year, by the way. It's great to see you.

So as you look into the latter part of next year, one of the things you point out in your note to us is that earnings tend to rebound out of recessions more than people expect. Do you think that this is going to be a typical pattern that would make valuations look a little more attractive by the end of the year?

EMILY ROLAND: Yeah, so right now we're, you know, sitting at about 22 times forward earnings on the S&P 500, and that's making it about a 22% increase in corporate earnings in 2021. You know, I think in a, you know, quote, unquote, normal year, that's something that can certainly be achieved. But as I mentioned, I do think that there's going to be some challenges. This isn't a normal year. We're still dealing with the remnants of the pandemic.

And the other thing to think about is in prior recessions, we've had much bigger declines in corporate earnings. So it's actually been easier to achieve those year-over-year improvement coming out of previous recessions.

So, for example, in 2008 we saw a 40% decline in corporate earnings. This time around, we only saw about an 18% decline in year-over-year corporate earnings. So I think the bar has been sort of raised, in effect, if you think about those year-over-year expectations.

So we just want to be careful here. A lot of great news has already been reflected in the markets. It reminds us a little bit about 2017 coming into 2018. Markets were really excited about tax reform. Earnings estimates were going up. And we want to just be careful here in terms of keeping risk balanced in portfolios, especially for the first part of the year.

MYLES UDLAND: All right, well, let's hope we don't follow up this year's Super Bowl with a couple of record Dow drops when we saw those 2,000 point declines in a couple of days back in 2018. All right, Emily Roland, co-chief investment strategist over at John Hancock Investment Management, appreciate the time.

EMILY ROLAND: Happy New Year.