What’s in Store for 2021?

        2020 was difficult.  I am grateful to welcome 2021 and the new beginning it represents.  As you may predict by now, any perspective on what 2021 will bring in terms of market performance is mere punditry.  In the words of Oaktree Capital Management founder, Howard Marks: “It doesn’t do any good to think about what’s going to happen to the economy, or for how long the stock market is going to decline or to how low. These things are unknowable. What really matters is whether price is proportional to fundamentals. It’s all about value.”  Certainly, no one can accurately forecast market performance, so if you’re so inclined, you can stop reading at this point!  For those interested in some observations, anecdotes, and “expert opinions”, I invite you to read on.

To put context behind the inaccuracy of most market predictions, look no further than 2020 for an example.  In early 2020, the Standard and Poors index of the five hundred largest publicly traded US companies (S&P 500) appeared to be headed for an encore of 2019’s whopping 30 plus percent annual performance before COVID-19 eroded nearly 35% by late March.  All signs pointed to a rough road ahead as fear and uncertainty gripped markets and economies.  Few predicted that by August all lost ground would be recovered, and the index would end the year positive 16% marking the fastest decline and recovery in the history of the primary benchmark for US equities.¹

There’s little doubt that swift central bank intervention in the form of massive debt purchases (monetary policy), loans and grants to small businesses, as well as direct “stimulus” payments to citizens provided the catalyst to stave off prolonged recession.  As acknowledged in past commentaries, capital markets do not always move in lockstep with the economy, and while the unprecedented Federal Reserve intervention unquestionably reversed the downward trend of equity markets, the primary question is if growth is sustainable sans additional intervention, and at what point will the economy (and markets) again become self-sustaining?  Additionally, and perhaps relevant for discussion in future posts: what are the long-term implications of the massive additional debt load?

What follows is a summary of reputable financial institutions’ outlooks for 2021:

Goldman Sachs²:

“…we expect above-consensus global growth of 6.3% in 2021, with our growth expectations exceeding consensus in all major economies except China.”

Charles Schwab³:

“Aside from the vaccine, other tailwinds include the prospects of a divided Congress and its relatively benign implications for major changes to tax policy, and stronger-than-expected corporate earnings…Stock valuations do represent a risk in 2021, especially if earnings do not live up to expectations; although multiples will continue to receive implicit support from extremely low interest rates. Valuation is as much an indicator of sentiment as it is a fundamental indicator—and frothy sentiment is also a risk heading into 2021. As the stock market recently reached new peaks and investor optimism has become more widespread, the risk grows that bad news could cause a near-term reversal.”

JP Morgan⁴:

“We believe there could be a “new normal” for equity valuation-as long as global central banks remain on hold (we think they will) and long-term interest rates remain near secular lows (we think they will). Of course, a risk to this view would be an unexpected rise in interest rates.”

In summary, prognostications appear to be cautiously favorable for the potential for additional global growth but are customarily tempered by the potential for very real risks that could threaten the rosy outlook.  Namely, a lack of efficacy of COVID-19 vaccines and timing of widespread distribution facilitating a return to normalcy.  Additionally, and thus far unaddressed, is the potential for ongoing political turmoil in the United States.  By the release of this newsletter, the ongoing US Senate runoff races in Georgia, as well as the certification of the electoral college by Congress should be known outcomes.  Prolonged political uncertainty has lent to market volatility as traders look for direction from lawmakers on fiscal and policy positions.  Finally, the potential for inflation from the massive injection of liquidity into the capital markets seems an eventuality.  “Experts” have been wrong on this prediction before.

What to do?

If you have read our commentaries for some time, you are familiar with a few refrains:

1. Volatility is an expected experience of owning securities – this truth is not simply contained to the stock or bond market, but is a reality for commodities, real-estate, currencies, and other asset classes albeit to varying degrees.

2. We believe that allocating to these various asset classes is the key to managing risk. “Diversification” is often applied at the micro level (within the same asset class – stocks for example), but it has relevance across the broader spectrum of asset classes.

3. Buying at market peaks and selling at troughs, while understandable, exemplifies the emotional nature of investor psychology and behavior. Our fear of loss is much stronger than our desire for gain, but both fear and greed can lead even the most seasoned/savvy investor astray.  Discipline is the key to long-term wealth building, and one of the best things we can do is to rebalance a properly allocated portfolio during periods of volatility.

4. Having a cogent, action-able plan provides the guiding light and counterweight to urge to sell/buy based on emotional response.

We continue to assess the investment landscape and are conscious of the fact that average bond yields are not exceptionally attractive but are convicted that they have a role to play for clients seeking to lower overall risk.  The acronym “TINA”, short for “There Is No Alternative” as it pertains to low bond yields and the pursuit of income points to support for additional upside in global equities.  As we continue to develop our models, we are keeping an eye of value-oriented and international positions as early indicators point to the potential for rotation into these areas of the market.

Thank-you for your confidence in our service to you as your trusted financial advisors.  We welcome an opportunity to speak with you through the medium of your choice.