Just months after the coronavirus triggered the deepest US economic plunge since the Great Depression, the ongoing recovery is strong enough to sustain the new bull market in stocks into 2025. So says renowned economist Allen ­Sinai, PhD, in an interview with Bottom Line Personal, pointing to historically low interest rates and massive economic stimulus measures. He cautions, however, that progress will be uneven as tens of millions of working families and small businesses continue to struggle…as a politically roiled Washington debates further stimulus…and as the world awaits widespread distribution of new vaccines and treatments to help contain the pandemic.

Here’s what Sinai sees ahead…

The Economic Outlook

Jittery investors must look past their fears now, despite the continued challenge the pandemic poses to the economy and stock market, and position themselves for much better times. After a 33-day bear market that ended March 23, the shortest in US history, stock indexes hit new highs within months even though many investors missed the start of the economic recovery, as they often do in the first leg of a new bull market.

Assuming the new president is Joe Biden, which had not been finalized at press time, the degree to which his administration will be able to enact additional stimulus measures and raise taxes on corporations, high-income individuals and capital gains will depend in part on two Georgia runoff elections for the US Senate scheduled for January 5. Those runoffs will decide whether Democrats control both the Senate and House…or Republicans retain control of the Senate.

Wall Street often favors a divided, gridlocked Congress. However, even if Senate control shifts to Democrats, I believe the tax increases that a President Biden would try to enact, along with regulatory actions he would take, would not undermine the bull market, although they might be somewhat of a drag on economic activity. And legislation to repair the nation’s aging infrastructure and to support development of clean-energy technologies could help generate millions of new jobs.

Key Economic Indicators

Gross domestic product (GDP), which rebounded sharply in the third quarter of 2020 after collapsing in the second quarter, likely will rise by a healthy 4.3% in 2021, after what I estimate to be a decline of more than 3% for 2020 overall. The economy’s gains will be driven by consumer spending, which is likely to rise 4% in 2021 as consumers are less homebound…lower unemployment…and a robust housing market that benefits from near-record-low mortgage rates. However, I expect it will take several years until we return to the same levels of economic prosperity and record-low unemployment that we had before the pandemic. 

Inflation will remain benign. Prices likely will rise by 1.5% in 2021, up from 1.2% year-over-year as of October 2020. Low inflation likely will persist for years because of depressed energy prices and the explosive growth of online shopping, with technology that makes it easy for consumers to compare prices.

Employment will continue to improve, but businesses—especially those hardest hit by the dramatic ­pandemic-induced changes in consumer behavior and those seeking to improve productivity—will not hire everybody back. I expect the unemployment rate to decline to 6.3% by year-end 2021, compared with 6.9% in October 2020 and a high of 14.7% in April 2020. 

Outlook for Stocks

Including dividends, the Dow Jones Industrial Average likely will gain 8% in 2021…and the S&P 500, 10%. Stock valuations from a historical perspective are high, but stocks still look attractive because of the massive boost I expect they will receive from rising corporate profits, which likely will grow by 25% to 30% in 2021 after having fallen an estimated 20% in 2020. 

Best areas of the market for 2021…

Information technology. This still is my favorite sector despite high valuations and concerns that earnings growth for companies that benefited from new spending patterns by homebound consumers will fade once the pandemic is contained. The digitizing of the world of commerce has just begun and will continue to change how we live, play and work every day. I especially like ­areas such as cloud computing and digital payments, which will replace paper cash. 

Health care. The entire sector will get a boost because patients have to catch up on long-delayed checkups and procedures. And the Affordable Care Act, which boosts business for insurers and medical-device firms, is likely to survive its latest encounter with the US Supreme Court. Note: Avoid large pharmaceutical companies, which may come under more scrutiny on drug ­pricing from Congress. 

Southeast Asia and China. Countries in this region have recovered much faster than the US and will become the new growth engine of the global economy. China could become the largest economy in the world within five years.

 Areas of the market to avoid…

Energy. This was the worst-­performing sector of the S&P 500 in 2020 as declining demand depressed prices. I expect a tepid rebound as global economies reopen in 2021 but oil supplies increase. Production will rise in the US and possibly Iran, too, if a Biden administration returns to the 2015 nuclear deal with that country and lifts sanctions.

Financial services. Many of these firms will continue to be challenged by low interest rates as well as executive orders from Biden that reverse the relaxation of regulations over the past four years…and the likely appointment of a new, more aggressive director of the Consumer Financial Protection Bureau. 

Some real estate investment trusts (REITs). I am very negative on various areas of commercial real estate, especially office buildings in big cities. Many companies will choose not to renew rental leases, or they will at least downsize and have some employees work remotely. 

Outlook for Bonds

Most US bonds look extremely un-attractive compared with stocks. The yield on 10-year Treasuries, which hit historic lows in 2020, was 0.84% as of November 30. With a strengthening economy, it should rise a bit to 1.4% by year-end 2021, which means the overall bond market, whose prices move in the opposite ­direction to yields, is likely to suffer losses in the low single digits for 2021.