As we position client portfolios in the early days of 2021, we look for potential opportunities that have emerged or may emerge and we try to identify some of the events that could be the catalyst for a pullback.
As always, we steer clear of prognoses and flag last year as evidence that movements in financial markets are impossible to consistently predict in the short term, but historically very predictable over a full economic cycle, which lasts six to ten years. Some of them are shown below.
Putting the pandemic entirely behind us will be a multi-year process, marked by crises and departures. It is therefore prudent to remain diversified and not to commit too large a percentage of its assets in growth or in value.
Democrats and Republicans will work closer than most think to accomplish certain things, including another round of stimulus and a 2022 tax package. However, we’re not as scared as many Democrats who are. move too much to the left and think that the influence of power rests mainly on the middle, the centrists.
Consider that of the 100 U.S. Senators, there are perhaps 40 on the left and 40 on the right whose votes strictly follow the party line. That leaves the bottom 20, Democratic Senators in Red States and Republican Senators in Blue who will be keenly aware that how they vote in the Senate will impact their chances of re-election.
This would also apply to those who hold similar elected positions in the House of Representatives.
The S&P 500 rose 14.87% to close the last two months of 2020, marking only the sixth time since World War II this index rose double digits to close the year. Statistically, this is pretty bullish for the following year, as each of the previous five times this has happened, the S&P 500 continued to post double-digit gains (Source – LPL Research).
Despite the above, we believe the rally that ended 2020 may have resulted in forward gains from 2021, and after the tailwind of pension deposits and IRA in early 2021, the market is ripe for a setback, which would remove some of the foam that has accumulated and allow for future gains.
As a result of all the financial stimulus and hopefully the end of the pandemic, there will be global economic expansion, which will expand stock market returns, to include mid and small caps as well as emerging markets. . It will also translate into more balanced returns when comparing the technology to other areas of the market.
The yield on the 10-year US Treasury bill will end closer to 1.50% than to 1.00% after the 2020 close at 0.94%. However, the move will be gradual and will not create a headwind for the stock markets, but for fixed income. It will be viewed positively by investors as “the rain after a long drought”. Banks and other financials stand to benefit if this shift in yields materializes.
However, at some point in 2022, the higher returns could create competition for stocks if this advance continues.
Once some of the excesses have been wrested from the more speculative areas of the market, long-term institutional dollars will go more heavily into alternative energy (hydrogen, solar, wind, fuel cells, electric), artificial intelligence (AI). ), genomics and fintech. ESG is here to stay.
While traditional energy companies may have a cyclical tailwind as the economy improves, dragging demand with it, the fact that they are in secular decline becomes more evident.
Americans as well as citizens of other countries escaped from the pandemic begin to travel in earnest in the second half of 2021 and into 2022. We believe that a partial repeat of the “Roaring Twenties” will occur, which is expected to happen. benefit associated companies. with the travel industry. However, these returns will favor some more than others as business travel will be slow to recover.
In fact, he may never make a full recovery, as teleconferencing has become much more prevalent due to the pandemic. That said, by the end of the year there will be more in-person meetings in 2021 than in 2020, but not as many as in 2019 or previous years.
Given our belief that interest rates will tend to rise as a result of stronger economic growth, we favor lower credit quality issues over more creditworthy companies; junk over investment grade; and investment grade relative to sovereign debt.
We prefer the middle part of the yield curve.
Bond prices move inversely with interest rates. As a result, falling interest rates in 2020 pushed bond prices higher. In fact, more than two-thirds of the total return of the Vanguard Total Bond Market Index ETF (BND) can be attributed to this drop in rates. If this decline stopped or, as we believe, reversed, bond market prices would slow, pushing total returns lower.
The potential “stagnation” of total returns would benefit some stocks. However, this would most likely also have a negative impact on interest rate sensitive sectors such as traditional utilities, telecommunications and non-durable consumer goods.
The evolution of Internet retail, brick and mortar, continues at a steady pace, despite the likely easing of pandemic restrictions as the vaccine rolls out. This will therefore continue to favor dominant companies in e-commerce as well as traditional retailers who continue to adapt to online consumption.
Please note that all data is for general information purposes only and does not constitute specific recommendations. The opinions of the authors do not constitute a recommendation to buy or sell the stocks, the bond market or any other security therein. The securities involve risk and fluctuations in capital will occur. Please research any investment thoroughly before committing any money or consult your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell securities for itself which it also recommends to clients. Consult your financial advisor before making any changes to your portfolio. To contact Fagan Associates, please call (518) 279-1044.