The single most striking thing about stock markets in 2020

was that they rose relentlessly, interrupted only briefly

by a steep decline in the spring,

despite the fact that a deadly pandemic was

sweeping the globe.

This apparent contradiction raises

deep and troubling questions about the relationship

between capital markets and the real economy,

and about the relationship between economic growth

and the welfare of actual human beings.

But we know part of this story has to do with interest rates.

Partly because of central bank activism,

and partly because of radically diminished expectations

for growth, long-term interest rates crashed

as the pandemic took hold.

And they have only slowly recovered from there.

All else equal, lower long-term interest rates

means a lower discount rate on, and therefore

a higher value of, the future cash flows from stocks.

And that meant that the biggest trade by far of 2020

was buying those companies that had the biggest cash

flows far out into the future.

And that meant tech stocks, which

saw their values doubled from their March lows.

So the big question for 2021 is whether these rising interest

rates and improved performance by cyclical value stocks

is the beginning of a true regime change within markets

after years of falling interest rates and market leadership

by growthy tech stocks?

The answer to this question will depend very much

on how smoothly the vaccination process goes

and on how much pent up economic demand

will be released when all of us, after a very challenging 2020,

get back to living a normal life.