While 2020 has been a tumultuous year, it did present several investment opportunities that benefitted our clients’ retirement portfolios. As we approach the upcoming holiday season and what we all hope will be a better New Year in 2021, we wanted to provide our clients with our 2021 Outlook, which we would title: 2021: Beyond COVID – Investing in the “New Normal”. This letter outlines our views on the markets, the economy, and the policies we see as having the most significant impact in 2021 and beyond.
Policy
For now, our outlook assumes that a divided government reduces the likelihood of dramatic changes in tax or regulatory policies – apart from any direct COVID-related mandates. We also foresee that Congress eventually will pass a fifth COVID-19 relief bill, but it will be smaller in scale than initially forecast. Most Importantly, we expect the Federal Reserve (Fed), supported by a Yellen-led U.S. Treasury Dept., will maintain its accommodative monetary policies and allow any signs of inflation, if they were to occur, to exceed their 2.0% target rate. In what we all hope soon will be a post-COVID environment, we expect the Fed will continue to support both the U.S. and global economies by maintaining low-interest rates and providing liquidity to the U.S. monetary system.
Economic Growth
Based on current economic projections, see more of a swoosh-shaped recovery (think Nike logo), characterized by a sharp decline and then a partial snapback, followed by a more gradual recovery as the most likely scenario. However, this outlook depends on the successful rollout of one or more COVID vaccines currently in various approval stages. If this were to occur, then we believe low to mid-single-digit U.S. GDP growth is possible in 2021 with the potential of an even higher rate globally. We also expect the U.S. dollar’s recent weakness to persist amid the current dovish Fed policy’s backdrop and continued twin deficit spending. While eventually, this will cause upward pressure on inflation, it also makes U.S. exports more attractive.
Stock Markets
Supported by a ‘don’t’ fight the Fed’ philosophy, we see the potential for further upside in the equity markets if the distribution of one or more of the many Covid vaccines in development exceeds current expectations. We also continue to broadly favor growth stocks in specific technology sectors like renewables, medical devices, and Fintech. However, as the markets’ recovery begins to broaden, we expect to see additional investment opportunities in more economically sensitive industries. Because of the more substantial relative growth rates and faster recovery from COVID, we continue to favor emerging markets, particularly those in Asia, over more developed international markets. But after favoring U.S. markets the past several years, we may look to increase our international equity exposure to take advantage of the large disparity in relative valuations.
Bond Markets
At perhaps no time since the Great Recession have bonds presented a more nuanced challenge for investors seeking both yield and security. Amid the backdrop of a potential post-COVID recovery, U.S long-term rates are just starting to rise – along with investors’ expectations about inflation. We share a similar outlook and expect longer-dated U.S. Treasury yields to follow, reducing the long-term return expectations for high-quality bonds. Remembering that bond prices move in the opposite direction of rising interest rates, an increase in inflation expectations will cause the value of longer-dated bonds to fall. This unavoidable relationship may force bond investors to be more creative in their search for yield, as the return for many low-risk bond investments may not even keep up with the rate of inflation. Although we continue to prefer mortgage-backed and investment-grade bonds for stability, if we see the risk of inflation increasing, we may complement our clients’ bond portfolios with additional floating rate and inflation-protected investments, including increasing exposure to non-U.S. bond investments.
Our 2021 New Year’s Wish
If we were to have one New Year’s wish for our clients in 2021, in addition to continued good health, is that the markets have another year of solid returns – preferably without the volatility experienced earlier this year. As we leave 2020 behind, this optimistic scenario is more likely if we continue making progress in controlling the global Covid pandemic. It is important to keep in mind that despite the many challenges brought about by this pandemic, the markets continue to be forward-looking over the long-term. As we gain more clarity on what the world looks like after COVID, we fully expect the financial markets to reflect this more positive outlook. We wish you continued personal and financial good health in the New Year to all of our many clients and friends.
A Final Reminder
Please note that our office will be closed on December 25th and 26th and from noon on December 31st thru January 1st in observance of the Christmas and New Year’s holidays.
Marc D. Saurborn, CFA, MBA, MScEng
Portfolio Manager & Chief Investment Officer
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