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What Investors Should Expect From 2021's Economic Climate

Economic Cycle Research Institute’s Lakshman Achuthan joined Yahoo Finance Live to break down what the economic outlook for this year looks like as stocks sell off on the first day of trading of 2021.

Video Transcript

ADAM SHAPIRO: Let's turn our attention to the economy, though, because the economy is always on the ballot no matter what kind of election you face. And we invite into the stream Lakshman Achuthan, who is joining us now. He is the Economic Cycle Research Institute. It's good to see you. It's been too long, and I'm glad you're here with us. Happy New Year.

LAKSHMAN ACHUTHAN: Good to see you. Happy New year.

ADAM SHAPIRO: I started off the hour by pointing out that the Shiller P/E ratio of the S&P 500 is pretty darn high now-- has been pretty darn high for almost 20 years. And even Shiller would say don't use that as your sole discretion as to when we get a pullback. What's the economy telling you? Is this economy in some parts-- because we know people at the lower end have been hurt. Is it overheating, perhaps, for the wealthy who have been able to save, save, and save?

LAKSHMAN ACHUTHAN: Well, I don't know if we're quite overheating, but it's certainly the reflation trade, the cycles underneath that trade which has come into vogue, today notwithstanding. Those are fully intact.

Remember now, nine months ago we made the recession's going to be short call, and that's all the way back in April. And then that was followed by a global industrial upturn call and then a US inflation cycle upturn call over the summer.

Those are cyclical moves, meaning that they're going to be pronounced, pervasive across the economy, and persistent. They're going to go on for a few quarters at least. That's about as far as the indicators can see.

And so that is underway. There was a lot of hand wringing, we may remember, last fall. What's going on with the economy, the new infections? This is all going to fall apart. There's the presidential election, all those things. And lo and behold, you know, everything has, in the aggregate, continued to advance.

I know that there is a group of people, the service-facing, lower-paying jobs that are really continuing to really just get hit hard. But when you look at the aggregate numbers, it's still moving to the upside. There's no end in that upturn in sight at this point. And so even though these are really big headlines-- you know, infections, stuff with elections, what's going on with stimulus, all of these things. I think the underlying trend is still to the upside, not quite overheating.

But we do want to keep a look-- we want to keep an eye on those interest rates and see what happens there because they do relate to market prices-- equity market.

SIBILE MARCELLUS: And what you're saying-- and what you're saying there in terms of long term is to the upside, but let's talk a little bit about this week. It's going to be a very difficult week. We're seeing a lot of volatility. Obviously the sell-off continues. How much is the Georgia race versus the vaccine rollout playing into all of this?

LAKSHMAN ACHUTHAN: You know, I think it is playing quite a bit into things. And so, look, whenever there's a recession and then a recovery which people don't really buy into-- when it first started last year, people had a hard time buying into the fact that there was a recovery. That has everybody untethered because they don't really have a framework to receive that information too well, and you do go to the headlines, the events.

Is the vaccine going to work? Is it going to take a long time to roll out? Is the election clear? Maybe it's not so clear. What's going on with stimulus? Maybe it is. Maybe it isn't, right? And we continue to get whiplashed by these headlines. And I think that that is weighing on the market, but if you step back and look at the cyclical trends, they're not that volatile. They are moving to the upside. I think they're setting up some future tension.

If the reflation trade continues, it's going to put pressure on longer-term interest rates, which begin to weigh on equity valuations down the road. And then, of course, you know--

ADAM SHAPIRO: Well, Lakshman--

LAKSHMAN ACHUTHAN: --I used this phrase the other day. Trees don't grow to the sky. This is going to turn, and when it turns, it's going to weigh on-- it's going to weigh on earnings. And so there is probably something out there to watch.

ADAM SHAPIRO: Help us understand the cycle. Where are we in the cycle? Because when you talk about the pressure on long-term rates, six months out, a year out?

LAKSHMAN ACHUTHAN: Yes. I mean, I'm talking months out, like a quarter or two. Right now, we've been-- we've run up to 1%, right, thereabouts on, say, the 10-year. And what happens here? It probably goes through that.

And, you know, it's just a psychological number, but it'll make headlines. People will see it. They'll start to say, wait a minute. What am I valuing this on, the Shiller valuations, other valuations? Does it really make sense this many times earnings?

I think the other thing is, you know, it's early days in the vaccine, but the story of this recovery has really been the manufacturing side, the good side. We've all been buying stuff, those that can afford it, and having it come back to the house. It's a red-hot manufacturing goods trade in the United States, and it's also powering global growth.

If you start to be able to come outside on the other side of these infections when they come back down or, you know, things get a little less tight, you can redirect that spending towards services, away from goods. That can generate a cycle downturn. We have to watch for that.

But so far, where are you in the cycle now? You're in a recovery. The inflation is moving up. Those two things are rock solid despite the headlines that are, you know, very worrisome.

ADAM SHAPIRO: And we are going to keep an eye on that. I want to point out that Lakshman Achuthan is an Economic Cycle Research Institute co-founder. It's good to see you again, my friend. I look forward--

LAKSHMAN ACHUTHAN: It's really good to see you.

ADAM SHAPIRO: --to checking in with you again in just a few weeks.


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