Hello friends, welcome to the January 2021 Market outlook. First and foremost, we wish you and your families a wonderful New Year! May 2021 fill your households with health, love, happiness and success; In Greece we say Ό,τι επιθυμείς! – Which translates to whatever you wish! May that come true for you and yours in 2021!
Just like in years past, this outlook will focus on the year ahead for financial markets. But I cannot tell you how the year 2021 plays out, I left my crystal ball in the car. And neither can Wall Street. When you look at the 2020 projections, the bull case was for the S&P 500 to finish the year at 3300/3400. Instead, the global economy was brought to its knees by a global pandemic, but the S&P finishes the year at 3700. Riddle me that batman. Here’s Sven Henrich’s take on it “I want to suggest humility in face of the reality that everybody has been wrong about their earnings growth, economic growth and yield forecasts over the past 3 years. Yes, central banks have been able to bail out bad forecasts yet again. But that lack of predictive ability by the entire spectrum of Wall Street and central banks should give everyone pause or it at least suggests to keep a watchful eye.” This isn’t a complete knock on Wall Street, but rather an example on how difficult this investment environment has become to predict. The market has never had more artificial influence than it does today.
From our perspective, everything out there screams expensive. It’s way too late to be buying, except for defensive measures, but even those hedges are expensive. So where do we go from here? Does the dichotomy between Main Street and Wall Street continue? It’s too soon to tell. Markets can stay irrational longer than one can stay liquid. This could be a topping process, it feels as if the upside potential is capped, while the downside risk should cause angst. Yet, nothing seems to derail this market. Yet it faces multiple headwinds; an increase in corporate taxes, exploding fiscal deficits, inflationary pressures and the potential rates to rise at the worst time.
As of this writing, the democrats have taken one seat in the Georgia senate run off. If Perdue does lose the other seat, the corporate tax rate goes to 28% from 21%. Using simple math, that would put 2022 eps (assuming it happens then instead of this year) falling by 9% to $173 from $190. If that were to play out, that would mean investors paid 24 times earnings for last four years for no increase in earnings. We would expect the market to pull back from all time levels if this occurs, probably to the tune of a 10-15 % correction.
Now, the democrats taking the senate would also mean a much larger fiscal stimulus bill in 2021. Something we have discussed in the past. That move would juice the market back towards all-time highs. From there, the focus will switch to the exploding deficits and increasing inflationary pressures. We’re already seeing it today. Commodities from natural gas, grains, metals and oil are moving higher at a fast pace. The bond markets move the last few days is pinning the Fed. Stating, if you’re not going to raise rates in an inflationary environment, will do it for you. This would be negative for stocks across the board.
What’s the expectation for 2021? Could stocks go down materially? Absolutely? Could the music keep playing for another year? Absolutely. But our expectation is a muted start to the year. Gyrations in the market but volatility will be subdued as we absorb the stimulus that will be coming. Towards the latter half of the year, we expect volatility to reach record levels, as the market absorbs the headwinds previously mentioned. The third quarter of this year will be extremely important. We have to give the past economic numbers a pass as they were in the midst of more lockdowns and the increase in Covid spread, and it’s why the biggest job losses came in leisure/hospitality and retail. The real test of the U.S. economy will come in Q3 when the vaccine has been widely distributed and we can assume that leisure and hospitality will have the quickest rebound. A lot will hang in the balance here. Our baseline expectation is for the indices to finish down to flat by the end of the year. I won’t give you a price projection, since I previously stated that no one’s been able to accurately predict it for some time.
Much still hangs on how the vaccination process will go. To date, were moving much slower than what the government put out in their time table. We also have a new strain. One in 50 people in the UK now have Covid. Here in Massachusetts, 94% of adult hospital beds are occupied. We cannot take the chance of a double dip recession here and for the economy to be shut down again.
This isn’t meant to be bearish- but to inform investors of the current situation. Where do we feel like folks should be positioned? We’re still very bullish on the following: Active management outperforming passive management is going to be a major theme. Meaning, picking individual companies rather than the indices (Jack Vogel isn’t going to be happy). In terms of asset classes, look to commodity stocks, precious metals, bank stocks, and low price to earnings value stocks that are not value traps, Asian markets and Emerging Markets.
To wrap up, here are a few surprises we don’t think the market is factoring in:
- Tesla’s stock finally materially declines. They haven’t turned a profit in 17 years when they had no competition and no advertising cost. If the EU is the bell weather for electric vehicles, Tesla is doomed. They have lost significant market share in Europe and Asia over the last two years.
- Joe Biden is able to unify this country and civil unrest ceases to be a problem in the second half of the year. We start off rocky though.
- Trump moves on and starts Trump TV. It’s already in the works. No opinion.
- Stocks experience very little volatility in the first half the year, but snaps back aggressively bring the indices lower over the remainder of the year.
- Banks outperform all other equities after feeling no love for the last decade.
- The dollar declines materially over the balance of the year and Gold reaches $29000/Oz
- Inflation and rates rip higher leading to decline in stocks
- Brexit doesn’t go as planned. Negative economic footprints are left that end up damaging the European economy. France goes on the brink of financial collapse as they have the highest debt to GDP ratio in the EU and suffer from negative rates.
- The pivot from Growth to Value accelerates
As always, please reach out with any questions, and here’s 2021 erasing 2020 from our minds. Be well.