Beware the Grey Swans of 2021

Without a doubt, 2020 was the year of the Black Swan event. No one outside of epidemiologist circles had foreseen a pandemic, and very few were prepared for its effects on the economy. With vaccine distribution underway, 2021 has a brighter outlook.

Still, there are risks to the economy. Fortunately, these risks are a known quantity—grey swans, as S&P Global Market Intelligence calls them in a recent post.

But having survived the pandemic, let’s not become inured to lesser risks. Just because we can foresee some of these developments happening doesn’t make them less dangerous. S&P Global Market Intelligence has outlined some of these possible events using analysis from Macro Hive. While they are not specific to commercial real estate, they will have an impact on the US economy and thus affect our industry. Two of particular interest to CRE: a drop in the recent record equity highs and the onset of inflation. 

A Stock Market Drop 

Record equity highs could be upset if there are more lockdowns and issues with vaccine distribution in 2021.

“The market is being priced for perfection,” Paul Schatz, president of Heritage Capital, told S&P Global Market Intelligence. “You don’t need much negativity to prick the balloon.”

One possible impact on the markets could be the unwinding of the Federal Reserve’s balance sheet as it steps back—or Congress forces it to step back—from its pandemic aid. 

“Stocks have largely rallied in lock step with the Fed’s balance sheet, all but ignoring the bad news on COVID, or economic woes,” Mark Newton, founder of ML Newton Advisors, told S&P Global  Market Intelligence. 

The Fed’s balance sheet reached $7.24 trillion in December, an approximate 75% increase since the pandemic began. This debt, coupled with a slower-than-expected recovery may be “a much bigger deal than what some realize,” Newton said. 

A Jump in Inflation 

Inflation is another potential grey swan risk in the coming year and beyond. While many people don’t expect a return to double-digit rates of the 70’s, a jump into the mid-single digits could be impactful, Matt Weller, global head of market research at GAIN Capital, tells S&P Global Market Intelligence.

While the US economy has been characterized with more than a decade of large government deficits and a low-interest rate monetary policy, Weller predicts a dramatic increase in price pressures next year.

“By summer, many consumers will have up to 15 months of pent-up demand bursting at the seams of their wallets, and once the pandemic is finally under control, all of this demand for travel, lodging, and large discretionary items could hit the economy all at once,” he told S&P.

Additionally, M1, which is the currency in circulation, has climbed 65% since the start of the pandemic. John Davi, founder and chief investment officer of Astoria Portfolio Advisors, tells S&P that increase could predict a moderate surge in inflation, which he estimates to be 3% to 3.5%.

A pickup in inflation is “all but certain,” said Steve Lipper, senior investment strategist at Royce Investment Partners, told S&P. “The investment debate will then shift to how sustained the increased inflation will be.”

Lipper also pointed to a third grey swan risk to the economy next year: delays in vaccine distribution.  The markets have priced in a speedy and smooth distribution, Lipper said. “This complacency seems to underestimate the logistical complexity of the vaccine manufacture and deployment for which there is no historical precedent on this scale.”

A Better 2021 

None of this is to even remotely suggest that 2021 will be on par with 2020. Recent developments such as a rebound in economic growth, the conclusion of the US presidential election, and better-than-expected news on vaccines, have provided hope for the economy, says Ryan Severino, Chief Economist, JLL, Americas, in a new blog post. 

He also acknowledges some uncertainty around the roll out of the vaccines, noting that budget shortfalls at the state level could affect the funding needed to distribute and administer vaccines. “If 2020 has taught us anything, it’s that we should expect the unexpected,” Severino says.