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We Underestimate How Strong The Economy Will Be In 2021

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We Underestimate How Strong The Economy Will Be In 2021

The US economy could have a historic year in 2021. This may happen as pent-up demand and government stimulus leads to a huge rebound, says a behavioral finance expert.

Morgan Housel is a former columnist with The Wall Street Journal. Now, he’s a partner in the venture capital firm The Collaborative Fund. He says the economy next year could match the post-WWII boom. This may take place as the country looks to get back to normal after the coronavirus pandemic.

After the end of the second world war, Housel said there was a desire to spend on consumer goods. This was after the U.S. economy had spent years focusing on the war effort.

“You had an incredible amount of pent-up demand for consumer goods,” Housel said. It’s “because everything was shut down during the war,” he mentioned first. He added that a lot of government stimulus from the GI Bill, which set the stage of the economic boom of the ’50s and ’60s” also contributed to this demand.

The Economy’s Current State

He compares that to today’s economy, which has been hamstrung by the coronavirus pandemic. Its current state is restrained by record levels of unemployment and disruptions to everyday life.

“Think of the amount of pent-up demand of people who are just so eager to get out of their homes and go on vacation, go back to a restaurant, combined with the incredible amount of government stimulus from both the Federal Reserve and from Congress,” Housel said.

“You put those two things together, and if we were to get a vaccine in the coming weeks, the coming months, going into early 2021, put all those factors together and what 2021 could look like is something most analogous to the end of World War II,” he added.

He says that may seem “ridiculous” right now, but that most people underestimate the odds of a huge recovery.

“There’s so much pessimism of what’s going on, justified pessimism,” Housel stated. Because of this, Housel said he believes “we underestimate how good 2021 could be going forward.”

“One thing that I think is overlooked or underappreciated today, are the odds,” he also said. While “this is not my baseline forecast,” he explains that “the odds that 2021 could actually be one of the best years for the economy in history, which sounds ridiculous given what we are dealing with right now,” Housel added during his interview on CNBC.

On Behavioral Finance

Regarding behavioral finance, Housel cautioned investors not to look too much into the last few days’ market setback. It’s all part of a healthy long-term market he says.

“The most important thing any investor can do, amateur or professional fund manager, is just understand the long history of market volatility and realize that when something like this happens, like what we’re dealing with today or on Friday, how normal that is over time,” he said.

“The stock market, on average, over the last 100 years declines at least 10% at least once a year,” he said.  “20% at least every two or three years,” he then added. “So when you deal with something like that, it doesn’t feel like it’s necessarily broken or something is wrong with the economy, but that this is the cost of admissions that we have to pay in order to achieve long-term returns.”

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