Take The Under On 2021 GDP

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Wall Street is universally bullish on the economy and stock market for 2021. For example, Morgan Stanley is on record predicting the U.S. economy will expand by 5.9% next year. The stock market has front-run this optimism. The most important valuation metric, total market cap to GDP, currently stands at an unprecedented 185%. This absurd valuation only makes sense if investors believe corporate profits will skyrocket next year. No other bull market in history even comes close to this historic distortion between the price of stocks and the underlying economy.

But, let’s take a moment to unpack this theory of a booming economy next year. To accomplish this, we first have to look back to what occurred during 2020. The outbreak of the Wuhan Virus shut the economy down for most of the first half of this year. But, after falling by a seasonally adjust annual rate of 31.7% in Q2, the economy rebounded sharply in the second half. Hence, the overall U.S. economy is projected to contract by about 3.5% for all of 2020. Don’t forget that the unemployment rate is still highly elevated and there are still many issues with small businesses that can’t access the capital markets. Hence, what have now is a highly bifurcated economy with some big winners and many huge losers.

2020 was marked by a tremendous divergence in economic sectors. There was a crash in the leisure and hospitality sectors, but a boom in home improvement, e-commerce, and the financial services industries. Most importantly, the reason why the entire economy didn’t crash throughout all of 2020 was because the government borrowed and printed $3 trillion and handed it out to Wall Street, small businesses, and individuals—with another $900 billion ready for dissemination in a couple of weeks. Therefore, for the most part, consumers simply switched from going out to eat, jumping on planes, and booking hotel rooms; to ordering electronic gadgets online, refurbishing their homes, and gambling on Wall Street.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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