Investor Outlook for 2021
Let’s leave 2020 behind. It was, after all, a year marked by the deadly COVID 19 Pandemic, a global economic slowdown, the worst US recession since the 1930s and the fastest (partial) economic recovery in history. The death toll and human suffering attendant with the Pandemic both in the US and abroad has been both scary and sad. Investors endured a drop in the S&P 500 of nearly 34% in just four weeks only to see the index recoup its bear market losses and reach a new record high in August. As we move into 2021 there is some reason for optimism. The US Presidential election is now resolved and the long awaited first delivery of a COVID vaccine has taken place. Though continued widespread lockdowns could temporarily dampen some optimism, the US economy is likely to improve and strengthen along with containment of the virus. The sequence of lockdown, monetary and fiscal stimulus, virus containment, reopening and then a gradual return to normalcy will be one followed by nations across the globe. The expected economic recovery here in the US will be aided by low inflation and accommodative monetary policy of the US Federal Reserve. In May, we wrote that “a modified V-shaped recovery is still a good possibility.” This accurately describes the progress seen in the US economic recovery over the past six months. In this modified version we initially see a strong rebound due to pent-up demand and historic monetary and fiscal stimulus. This modified V-shape has also been called a square root (√) recovery in which growth flatlines well before reaching prerecession levels. Much of the step-down in trend growth has been the result of deep losses suffered in consumer services categories like travel, entertainment, hotels and restaurants, all of which have been deeply hurt by social distancing and other containment measures. Some of these losses may never be recovered as Americans adjust to life in the new normal. The uncertainty in the path forward is rooted in the difficulty in predicting how geographies, supply chains, retail channels and consumer behaviors will evolve post-pandemic.
Much of the market run-up this spring and summer was led by the big 5 stocks, Amazon, Apple, Facebook, Google (Alphabet) and Microsoft, which stocks collectively account for almost 25% of the capitalization of the S&P 500 Index. Through August (2020 YTD) the big 5 were up 65%, while the entire remainder of the S&P 500 had advanced only 3%. Beginning in September the market has taken notice of overall improving conditions and a rotation away from growth stocks (including the big 5) to value stocks has begun. We think this rotation could continue as economic recovery broadens in 2021. An expected positive result of this rotation is better market performance breadth, including stronger, more evenly weighted performance within the S&P 500. Coincident with this rotation we see a continuing equity market rally that is defined by broader sector participation and a shift in market leadership away from just a few dominant leaders. In addition to the aforementioned growth to value shift, we see other rotations underway including large cap to small cap, defensives to cyclicals and WFH (work from home) stocks to consumer services stocks. We suggest that investors view these apparent market shifts or rotations as both challenges and opportunities. Stay disciplined, remain fully invested, avoid the temptation to react to yesterday’s news and maintain diversification (across and within asset classes) in your portfolio. Take a few moments to reconsider your risk profile in light of the unusual circumstances we will face here in 2021 and beyond. Evaluate and understand all of your investments and do not allow the search for yield to add unnecessary risk to the fixed income portion of your portfolio.