Even with a Covid vaccine, U.S. economy will likely get worse before it gets better: Ned Davis Research

We still haven’t seen “the storm before the calm.”

So says Alejandra Grindal, senior international economist at Ned Davis Research, despite the market’s run to record highs, reignited Tuesday by positive announcements around a Covid-19 vaccine.

The U.K. began rolling out Pfizer and BioNTech’s vaccine to its citizens Tuesday, just as the U.S. Food and Drug Administration said the vaccine raised no specific safety concerns.

Even so, “things will get worse” before they get better, Grindal told CNBC’s “Trading Nation” on Tuesday.

“We could see things get a little worse in Q1, especially if the virus gets worse and worse, lockdowns stay longer and we don’t get a renewal of that stimulus” that Congress passed in March, she said.

While a U.S. vaccine rollout in the second quarter of 2021 would likely spark a bigger turnaround, the key will be getting through the next three months, Grindal said.

“Mass deployment of some sort of vaccine early on in Q2 or throughout Q2 of 2021 … could fuel a pretty sharp recovery not only in U.S. economic activity, but also global economic activity due to pent-up demand, especially for a lot of services, as well as pent-up savings to be able to drive that demand,” she said.

Certain international players are already leading the charge, the economist said.

Global new export orders just logged their third month in a row of expansion, with China’s purchasing managers’ index climbing to its highest level since 2010 and the U.S. PMI breaking above a 2015 peak to reach the highest level in the world, according to Grindal’s latest note.

“When you’re looking at the global economy in aggregate, China plays a pretty big role. It’ll likely be the only contributor, at least major contributor, to global growth this year,” she said. “They focus slightly less on services, which [have] been more Covid-sensitive, and more so on manufacturing, and we’ve seen a pretty sharp recovery.”

Europe, the U.K. and Japan, on the other hand, remain vulnerable to “really sharp double-dip recession risk,” she added.

The “million-dollar question” some may have is how U.S. policy toward China might change when President-elect Joe Biden’s takes office, but Grindal didn’t expect a huge overhaul.

“Investors will be mistaken if they feel that under a Biden administration the U.S-China trade war will be over. That’s very unlikely,” Grindal said. “One big development that we’ve had over the past four years is this general view both among Democrats and Republicans that China has engaged in unfair trade practices.”

Biden said last week that he would not seek to immediately remove the Trump administration’s tariffs on China and would instead focus on “develop[ing] a coherent strategy with U.S. allies.

“He’ll probably remove them maybe as a leveraging tool, maybe to allow U.S. companies to engage in Chinese ventures a little easier or perhaps in exchange for some sort of human rights benefits,” Grindal said.

“The biggest change that I think you would see between Biden and the Trump administration is that Biden will be much less abrupt. So, I don’t think he’ll tweet overnight and say, ‘We’re going to have a big increase in tariffs tomorrow,'” she said. “From that perspective, I think that’s relatively market-friendly, because as we saw in 2018, a lot of these abrupt tariffs did create a lot of jitters in the market.”

Ned Davis Research still recommends being overweight equities, with a tilt toward emerging markets on the international front.