First Half Outlook 2021
I think we can speak for everyone when we say, "Good riddance to 2020!". Between the COVID-19 pandemic, social unrest, and the presidential election, this has certainly been a year that's tested our resolve not only as American's but as human beings. Although the markets seemed to have recovered towards the end of the year, our expert financial advisors and financial planners continue to monitor the economic landscape heading into the new year. Please continue reading to hear their complete analysis and recommendations going into 2021.
"Coming together is a beginning. Keeping together is progress. Working together is success." - Henry Ford
Goodbye 2020! This rollercoaster ride that started early last year is almost over, but don't take your seatbelts off quite yet. To recap, after a good year for the financial markets in 2019 we felt like 2020 would produce positive results as well (which ultimately happened). Falling interest rates, the prospects for steady GDP growth, and good earnings growth furthered the case for another year of decent stock performance. The Dow Jones posted early gains and was nearing the 30,000 mark last February.
Then COVID-19 struck, and within a few weeks fear of the unknown took over our lives and the financial markets. During the month of March the Dow Jones fell to a low of 18,213. Thankfully the crash ended quickly and we began to claw our way back almost immediately. The quick relief in the financial markets was largely due to the massive amounts of fiscal and monetary stimulus from the government, and the hope that warmer weather would bring needed relief on the disease front. However, during the summer months, the virus had grown more rampant and our economy remained partially shut down. With the government backstopping our economy with trillions of dollars in stimulus and the increasing prospects of a vaccine, the stock market continued its recovery into the fall. The November election was very noisy and combative, but we always felt the path of COVID was the main driver of our economy in the near term. The markets proved to be even more resilient during the second half of the year and our ISG portfolios produced another solid year of performance, even as we were more conservatively positioned during most of the summer and into the fall.
As we welcome in 2021, the backdrop for the economy looks encouraging. The election cycle has ended and the deployment of the vaccines is happening. The rate of deployment and continued effectiveness of the vaccines will determine how quickly we get the economy moving forward. We are hopeful that the current bottlenecks and kinks in the distribution chain will be addressed with greater speed and efficiency in the near future.
People are craving to resume a more normal way of life - seeing friends and family, going out to eat, taking the vacation that was postponed, etc. In short, there is a ton of pent-up demand. The Federal Reserve will continue with its very accommodative monetary policy and will likely keep short-term rates at zero for years. Fiscal policy continues to be supportive; congress recently passed another $900 billion stimulus package and may potentially pass more stimulus as the new administration takes over. All of this stimulus must come with a price? We must assume that price will be higher taxes at some point in the not too distant future. The $900 billion COVID Relief Bill included the following items:
$286 Billion in Direct Aid — including $600 checks and $300 weekly unemployment benefits
$325 Billion for Small Businesses — about 90% going to Payroll Protection Program
$82 Billion for Schools — $54 billion going to elementary and secondary schooling and $23 billion to higher education
$69 Billion for Public-Health measures — the bulk for vaccinations and testing
$45 Billion for Transportation — airlines, highways, Amtrak and MTA
$25 Billion in Rental Assistance — 20 million Americans have fallen behind on rent
$13 Billion for additional SNAP benefits — food assistance programs
$55 Billion in Pork — vaping products, space force, corporate tax deductions, museums, horse racing, clean energy, etc.
The economy should continue to recover as vaccines are more widely distributed; with the consensus calling for a very robust economy in the second half of 2021. For now, though, we are seeing record COVID infections, hospitalizations and deaths. We have also seen an uptick in jobless claims, business closures (especially restaurants), locally mandated lockdowns and reduced consumer spending. Our forecast assumes that COVID is mostly under control in the US by July and the economy is well on its way to fully reopening (more job creation). The charts below illustrate the severe job losses, the sharp rebound, and the fact that we still have 10.7 million people that are unemployed.
We are optimistic that the vaccines will be widely distributed throughout the year and the economy will continue to gather momentum as we move through 2021. The valuations on the stock market are a little stretched and are pricing in a strong recovery in earnings during 2021. In short, we need a fairly robust economic recovery to justify much higher stock levels.
With that said, global equity markets could perform reasonably well, helped by the same factors that drove 2020: supportive fiscal policy and ample monetary liquidity. Not to mention there is over a Trillion dollars in cash on the sidelines earning almost nothing that could eventually make its way into risk assets. Longer-term, more liquidity could mean higher inflation in the future. Traditional inflation measures like CPI or PCE will probably stay below the Fed's target of 2% for some time, but we may see inflation in the form of asset prices. We believe the Federal Reserve will hold short-term interest rates near zero for several years, which translates to lower returns for our bond holdings. If this holds true, we will be relying on our stock and hybrid positions to pull most of the weight this year, and our bond positions to provide protection and diversification.
In the meantime we will continue to focus on the core tenets of our investment process - long-term risk adjusted returns and constructing durable diversified portfolios. We thank you for the confidence you have placed with us and we look forward to continuing to serve you. We hope to see all of you more this year as COVID dissipates. Bottom line - we miss seeing our clients face-to-face!
Sincerely — Your ISG Team