The Best and Worst of Times
Pandemic deaths continue to mount, but vaccine deployment and massive policy support will lift growth in 2021.
The U.S. economic recovery continued in the fourth quarter even as new COVID-19 cases surged, with real gross domestic product (GDP) increasing at an annual rate of 4.1 percent. As of January 2021, U.S. real GDP had retraced 85 percent of the decline that occurred in March and April of 2020, while employment had retraced 67 percent of its decline through February. Nevertheless, output and employment remained 3.6 percent and 5.4 percent below their February peaks, respectively, much worse than during the first year of past downturns.
Employment Remains Considerably Below Pre-Covid Levels
U.S. Employment During Recessions, Cumulative Change From Cycle Peak
As of January 2021, U.S. real GDP had retraced 85 percent of the decline that occurred in March and April of 2020, while employment had retraced 67 percent of its decline through February. Nevertheless, output and employment remained 3.6 percent and 5.4 percent below their February peaks, respectively, much worse than during the first year of past downturns.
Source: Guggenheim Investments, Haver Analytics, BLS. Data as of 2.28.2021.
The good news is that several highly effective COVID-19 vaccines have begun to be distributed in the United States and elsewhere. With herd immunity likely attainable this summer, we expect the beleaguered service sector to experience a strong recovery in 2021 as the need for social distancing gradually diminishes. In addition, consumers—already holding excess savings of roughly $1.8 trillion—are seeing a further boost to disposable income as the $900 billion stimulus bill passed in December shows up in the data. Nearly $1.9 trillion in additional stimulus is set to be passed imminently. The combination of progress in the fight against COVID-19, massive fiscal stimulus, and extremely easy financial conditions should boost real GDP growth to 6–7 percent in 2021, the strongest since 1984.
We expect the Fed to do its part to support the recovery, guided by a new and more dovish policy framework. The Fed will no longer aim to cool an overheated labor market but will instead strive to overshoot the 2 percent inflation target in order to compensate for past periods of below-target inflation. While headline inflation is certain to rise in coming months due to sizable base effects, policymakers' focus is on the much weaker underlying inflation trend in place. As core inflation lags real GDP by about 18 months, more sequential downside is ahead over the next several quarters, and the experience of the last expansion suggests the Fed will struggle to achieve its 2 percent inflation target, let alone exceed it on a sustained basis, based on globalization, demographics, and technological trends.
Fed Is Likely to Maintain Maximum Accommodation as Inflation Falls Short
Cumulative Core PCE Inflation Shortfall From 2 Percent Target Since Business Cycle Peak
As core inflation lags real GDP by about 18 months, more sequential downside is ahead over the next several quarters, and the experience of the last expansion suggests the Fed will struggle to achieve its 2 percent inflation target, let alone exceed it on a sustained basis, based on globalization, demographics, and technological trends.
Source: Guggenheim Investments, Haver Analytics. Data as of 11.30.2020. Note: Dotted purple line shows Guggenheim forecast for cumulative core PCE shortfall at the end of 2023 rather than the precise forecast path.
These conditions virtually ensure that the Fed will keep its policy rate at zero for at least the next several years while maintaining an aggressive pace of Treasury and Agency MBS purchases well into 2022. Our expectations for the path of Fed policy in coming years translate into a fair value estimate for 10-year Treasury yields of 0.85 percent, indicating that yields have risen too far too fast, aided by bearish seasonals. We see a constructive near-term backdrop for credit markets as deeply negative real interest rates and low FX hedging costs will spur a reach for yield. A key risk to our bullish view on credit is the emergence of several new strains of COVID-19, which raises the prospect of a much longer and deadlier battle against the coronavirus.
—Brian Smedley, Head of Macroeconomic and Investment Research; Maria Giraldo, CFA, Managing Director; Matt Bush, CFA, CBE, Director
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
©2021, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share their outlook for the first quarter 2021.
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 12.31.2020 and includes leverage of $13.7bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.