When the vaccine is implemented and the pandemic is behind us, there will a powerhouse of pent up demand that will propel a booming recovery. Tax revenues will grow accordingly even without a tax rate increase, but there is a downside.

Inflation has been limited by low velocity.  We have created a lot of money to soften the blow of the pandemic, but we are spending less as we shelter in place, avoiding travel and entertainment venues.  When the surge in consumer demand meets a dramatically increased money supply we will likely see inflation, and it will increase interest rates.  Higher interest rates on treasuries will hurt the stock market as they become more suitable investments for lower risk profiles. Higher interest rates will increase the deficits.  Our huge debt will become a much greater liability.

This could mean a better performing economy but strong pressure on the stock market. Banks will make more money but will sell at lower PEs.  Asset based shares will rebound, high PE tech firms will retrench.

The biggest headwind to a better economy is that higher interest rates will expose a lot of zombie businesses that can not survive in a higher interest rate market. This shakeout may take some time but is necessary to build a sound and growing economy.

 

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