Economic Outlook – Winter 2021

Will the COVID-19 vaccine finally unleash a cabin-fever crazed consumer and continue to fuel economic expansion in 2021?

January 2021 continued 2020’s trend of surprises with some interesting activity. For one, we saw a large number of retail investors organize themselves via the social media app Reddit, in an effort to increase the price of several stocks that were under attack by hedge funds. Stocks like GameStop and AMC Entertainment saw huge bouts of volatility. In a more concerning trend, variant strains of the Coronavirus are popping up around the world with reports that some are more contagious or more virulent than the common one. It appears vaccines are effective against these variants but we are keeping a close eye on it.

The word of the year for 2020 will likely be “unprecedented” as we experienced things that were unimaginable in a pre-COVID world. The stay-at-home orders that were put in place in March put an abrupt halt on what was the longest-running economic expansion in history – essentially like pulling the emergency brake on the economy. We saw unemployment reach levels not seen since the great depression as the number of people filing for unemployment benefits was literally off the charts.

Figure 1: Source: National Bureau of Economic Research








Since the lows of March and April, we have seen a recovery on the whole that masks a large divide. Businesses in the “stay-at-home economy” are thriving. Companies like Amazon, Uber-Eats, and Zoom are all doing really well. We also are seeing Home Depot and Lowes report strong numbers as people unable to travel have been doing more at-home projects. This author was part of that crowd over the summer.

The travel industry, on the other hand, continues to suffer. Hotel occupancy, car rentals, airline traffic are all at fractions of their pre-COVID levels. While these are starting to pick up, it will be important to monitor through 2021 how these industries are able to recover.

Outlook for 2021

Our base case is for continued economic recovery overall sectors. The continued improvement of the vaccine rollout is encouraging. If this trend remains, by the time summer hits consumers will be spending lots of time and money on travel and going out. As of this writing, the third round of stimulus has not been passed, but our expectation is that it will soon, adding more support for families, business, and infrastructure that sorely need it.

Below are some economic data points that help paint the picture. We start with one of the biggest economic drivers, the US Treasury 10-year interest rate.

Figure 2: Source:







While interest rates have risen off of the lows from the summer, they are still historically very low. This has helped fuel house purchasing and mortgage refinancing, supporting an uptrend in home prices.

Figure 3: Source: S&P Dow Jones Indices LLC








Mortgage refinances have put additional cash into household budgets and since people are not spending on travel and going out to restaurants, more of that money has been going to home projects. Increased remodeling activity and home building have caused lumber prices to increase over the past year.

Figure 4: Source: U.S. Bureau of Labor Statistics







And, it’s not just the housing industry that is seeing an increase in prices. Other commodities, like coffee, have also increased over the last year.

Figure 5: Source: International Monetary Fund







One of the factors being blamed for these increases in prices is the declining value of the dollar compared to other currencies as measured by the dollar index.

Figure 6: Source:







A declining dollar can be a near-term positive for the economy as our goods and services become comparatively cheaper to international markets. Fords and Harleys are increasingly more affordable to European and Japanese buyers as their euros and yen go further. It could become a serious issue in the longer term, so we will continue to monitor closely.

What does it all mean?

The boost provided by government stimulus going to an increasingly vaccinated population could be a significant tailwind to this ongoing economic expansion. Our base case is that the economy will continue to grow, and even accelerate, throughout the year.

The increase in prices in certain sectors is not a sign of worry …at the moment. Increasing prices is a normal part of economic expansion and overall inflation is still muted. However, it is something we will continue to monitor and could be a risk down the road.

The biggest risk to the economy right now is if the new variants to the Coronavirus cause another shutdown. Also, if the next round of stimulus is delayed too long, or if the lingering effects of prolonged shut-down prove to be more severe than we currently believe, that could cause a downturn in the overall economy.

We started the year by increasing our stock allocation back to target levels after being conservatively tilted for most of 2020. As a reminder, while the economic environment and fundamental factors like stock valuation will drive how we tilt investment portfolios, the main driver of allocation decisions for any portfolio needs to be each client’s individual return expectations and risk tolerance. No one has a crystal ball and markets have a long history of making overly smart people look foolish. As a trust department, our goal is smart, disciplined allocation decisions that make the most sense for our clients over the long-term. We make investment decisions that give our clients the greatest confidence in reaching their financial goals.

We welcome any questions you may have. Have a safe and prosperous 2021!

Best wishes,

Keith J. Akre, CFA, CFP® – Vice President & Trust Officer

Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.