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Vaccine optimism could feed into the market's biggest near-term risk, says top economist, who sees full recovery in 2021

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How vaccine hopes could fuel a major market risk: Economist

The market's relief rally does not come without risk, according to one top economist.

This week's surge in the U.S. stock market may have been fueled by word of a 90% effective Covid-19 vaccine, but investors shouldn't get too comfortable rallying on optimism just yet, Michael Darda, chief economist and macro strategist at MKM Partners, told CNBC's "Trading Nation" on Wednesday.

"In the near term, the risk is obviously this surge in infections, ... being led by the Midwest and the West," he said.

"The vaccine is not going to be here overnight. It's going to take time to roll it out, to get it distributed and disseminated. And so, in the interim, if we let our guard down, we could have some problems, even potentially prompting partial closures again."

While the pace of the economic recovery has exceeded much of Wall Street's expectations, unprecedented coronavirus case spikes across the country are without doubt a threat, said Darda, who expects a full recovery by the end of 2021.

"Longer term, I think we have to be very optimistic that we'll return to full economic health, but in the very near term, the rise in case counts is worrying, and if the good news on the vaccine feeds into this sense of complacency and we let our guard down, that could be a potential problem," he said.

The labor market is painting a rosier picture, according to Darda's research.

U.S. employers created more jobs than expected in October, with unemployment sinking to 6.9% from 7.9% in September, the Labor Department reported last week.

"Even though the economy remains depressed — we're certainly nowhere near full employment — the unemployment rate has been dropping very rapidly over the past six months," he said.

Jobless claims are also on the decline, with the National Federation of Independent Business reporting that small businesses had record-high job openings in October, Darda said.

Small business owners also showed increasing confidence in the economy's health, with nearly a fifth of those surveyed planning to create jobs in the next three months, according to NFIB.

"As long as those high-frequency indicators in the labor market continue to improve and confidence holds in there, I think we can continue to look forward to an ongoing business cycle recovery and hopefully, before 2021 is out, ... a return to full economic recovery, full employment."

Darda's S&P 500 target for the end of this year remains 3,600, which would be an all-time high for the index, just above its Sept. 2 record. It implies less than 1% upside from the S&P's Wednesday close of 3,572.70.

"I think these gains are definitely supported by the fundamentals turning," Darda said. "We could build on them, but the bulk of the gains are probably in place now."

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US economy could see a full recovery by 2021, says top economist