The stock market will become disconnected from the economy in 2021 as companies expand layoffs, money manager says

Economy recession coronavirus Germany
A waitress walks past empty chairs and tables in a restaurant in the city of Rheda-Wiedenbrueck, western Germany on June 23, 2020.

  • The stock market will become disconnected from the economy in 2021, as a lot of layoffs become permanent, a money manager said. 
  • RiverFront Investment Group’s Kevin Nicholson, said firms focusing on profitability next year will create a “divergence between the economy and the market.” 
  • More than 13.5 million Americans are still out of work compared to a pandemic high of about 23 million.
  • Nicholson said he expects the S&P 500 to level between 3,400-3,450 until January. 
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The economy and stock market will become increasingly disconnected from each other in 2021, as companies are likely to reduce headcount to increase profits, manager Kevin Nicholson told CNBC’s “Trading Nation” on Thursday. 

The co-chief investment officer of global fixed income at RiverFront Investment Group said firms are going to focus more on profitability next year, and this is “going to create a divergence between the economy and the market.” 

Nicholson, who manages $7 billion of assets according to CNBC, said this divergence will hinder the US economic recovery from the pandemic due to the adverse impact it is expected to have on consumption. 

“You can increase profits in two ways. You can either increase your sales and revenue or you can cut costs,” he said.  “I believe that companies are going to do the latter and the biggest expense they are going to have is their employees. A lot of these workers that were furloughed will not end up coming back to work and they are going to be permanently unemployed.”

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Nicholson said: “The pandemic pledge that a lot of companies put out there will go away as they move towards focusing on profitability unless they are not laying off workers.”

More than 13.5 million Americans are still out of work compared to a pandemic high of about 23 million. Data from Yelp this week showed 60% of US businesses that have shut since the start of the coronavirus pandemic won’t ever reopen.

The report, published on Wednesday, said a total of 163,735 US businesses have closed since the beginning of the pandemic as of August 31, marking a 23% increase since July 10. 

Nicholson said he is expecting the S&P 500 to range between 3,400-3,450 until January and “move sideways” due to volatility caused by the upcoming election. 

The index has risen about 53% since touching multi-year lows in March, thanks to a boom in tech stocks and a period of rock bottom interest rates as the Fed has poured trillions of dollars worth of stimulus to prevent the economy from collapse. 

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US jobless claims fell more than expected this week, but Nicholson said he is still concerned about the labour market. 

“In the beginning of the pandemic we lost [about] 22 million jobs, and we have put only roughly a little over 10 million back to work,” he said. “As each month goes on past June, delta, that rate of change is declining. That is leading me to think we may have a job-light recovery as we get through the pandemic companies are going to right size the business,” he said.