Last March, the World Health Organization declared the COVID outbreak a pandemic as the worldwide case count crossed 100,000.  Later that month, we wrote about how businesses would manage the wrenching change in supply patterns for their products and services as we adjusted our demands to support quarantines at home.

As we approach the first anniversary of the COVID impact here in the U.S., our economic future looks markedly different. After the equity returns of 2020, investors wonder what to expect for 2021. Growth stock returns exceeding 30% supported equity markets in 2020, driven mostly by tech firms focusing on e-commerce and the virtual economy. On the other hand, value stocks with greater exposure to the economic cycle returned less than 10%. Equity markets take their cue from the economy, and the ingredients for additional expansion are in place.

Demand is growing

While quarantines and lockdowns devastated some businesses, many others reported strong earnings in 2020 due to growing demand for their products and services as the year ended.  Manufacturing will come out of this recession with a larger share of the economy, breaking a pattern seen in the previous three recessions.  New orders for autos and parts over the past few months exceed those booked in the months leading up to the pandemic.  Orders for generators are 2.5x higher than a year ago.  Multiple microchip makers report bookings and backlogs at all-time highs and may not resolve until the end of 2022.  This surging demand reflects the changing outlook for consumers and the businesses who serve them.

Commodity prices are increasing

Rising commodity prices rose in the second half of 2020, reflecting economic optimism concurrent with positive vaccine news. Gold topped $2,000/ounce for the first time. Oil prices moved past $50/barrel as economic activity returned, and Saudi Arabia decided to lower production for February and March to support oil prices.  Doing so is the opposite of their gambit last year to gain market share by boosting production. Prices for copper and other raw materials are climbing as a renewed focus on economic stimulus in the U.S. and expanding demand from China, the world’s biggest commodity buyer, will further increase consumption. The downside of this good news is that input prices for your products are now rising too.

Supply is lagging

Many companies are having a hard time meeting the demand for their products, to say nothing of rebuilding reduced inventories. Failing to fully staff production lines has been just one of the weird outcomes of high unemployment figures, despite managers taking additional measures to account for COVID-related concerns. Absenteeism due to spiking COVID cases is a temporary contributor to the supply problem, but the degree to which line workers return remains an open question. Competition from rapidly growing e-commerce operations, much of which pays better than factory work, does not help. The upshot is that solving this problem will require investment in capital (new factories) or labor (higher wages), both of which offer their economic stimulation.