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In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 +10.99% YTD through 12/07/20)
The S&P 500 Index climbed to all-time highs in November as news of two highly effective vaccines (efficacy over 95%) delighted investors. November turned out to be the best performing month since April with the Index rising 10.8%. Investors shrugged off the spike in new Covid-19 cases, record deaths, and increased hospitalizations. What they focused on was the re-opening of our economy, the fact Covid-19, to a large extent, should be behind us a year from now, and that the election was nearly perfect – resulting in gridlock.
It’s anticipated that the first vaccines will be available sometime in December with more broad availability by springtime. That might allow life to get back to normal by mid-year through herd immunity and widespread vaccinations. The result could be greatly accelerated economic growth in 2021 and beyond.
Seasonally, this is typically a very strong time of year for stocks. The market tends to have an upward bias between Thanksgiving and mid-January. And while many investors have questioned whether stocks can rise in the depths of a pandemic, the answer lies in the forward-looking nature of the stock market. It anticipates conditions 6-9 months into the future. As such, it is recalibrating values constantly based on expectations of future earnings and growth.
We believe the explanation for the stock market’s recent strong performance is that the market is looking past our problems and seeing blue skies in the distance. If you look around the world, Asia is in recovery from the virus and Europe is a few weeks ahead of us.
Factors Affecting Stocks In 2021
As we look ahead to 2021, we see several positive factors that could propel stocks higher:
✅ New Economic Cycle: A new economic cycle could propel growth through the winter and into next year – GDP could grow 5-6% in 2021.
✅ Liquidity: There are extraordinary amounts of liquidity in the U.S. financial system. This is helping to keep businesses afloat that would have otherwise failed.
✅ Free Cash Flow: Corporate free cash flow is 4%, which is well above the 10-year Treasury yield of 0.95%. Consequently, stocks are still attractive compared to their bond counterparts.
✅ Money Injection: $2 Trillion has been injected into the economy over the last 12 months. That’s a tremendous amount of buying power for consumers who represent 70% of our economy.
✅ Cash War Chests: Companies are building cash war chests with rates at less than 1%. This is adding value to their balance sheets as these funds will be earmarked for mergers, capital projects, R & D, as well as more dividends.
✅ Additional Stimulus: More stimulus is likely on the way from Congress – small businesses are in desperate need of help as are individuals hurting from renewed lockdowns.
✅ Demand: There is tremendous pent-up demand – people want to get back to living their lives – going places, doing things, and enjoying life.
The good news in the economy is that the Atlanta Fed is predicting that GDP could grow +11.2% in the 4th quarter. That level of growth would be outstanding given the increased lockdowns and additional restrictions. What this signifies is just how incredibly resilient and adaptable businesses are in America.
However, things won’t be quite the same after this is over. Working from home may be permanent for some and more regular for others. The need for office space will diminish and business air travel could decrease permanently. In addition, extra living space is in high demand, as homes are being converted into offices, classrooms, and entertainment areas. Plus, the digitization of our economy is in full swing.
It appears that the dollar is weakening vs. other currencies, and that trend may be with us for several years to come. Historically, when the greenback is weak and falling, foreign indexes tend to outperform. This could bode well for foreign stocks in the years to come.
Foreign indices have a high concentration of Materials, Financials, Communication Services, and Industrials. They’ve also tended to outperform their U.S. counterparts as the dollar declined. We are just now seeing overseas investments start to outperform domestic investments and that’s why we are increasing our overseas exposure.
Small & Mid-Cap Stocks
One of the areas that has underperformed large-caps during Covid-19 are small-cap and mid-cap stocks. That’s because large caps benefited greatly from gains in the technology and communications sectors. Plus, smaller companies tend to get hit harder by recessions – their revenues are more economically sensitive, and they have less means of securing capital.
Next year, small-cap company earnings are expected to grow 30% over what had been previously forecast. When the economy starts to recover, these small and mid-cap companies tend to outperform large-cap stocks by a wide margin.
Stocks shrugged off a spike in Covid-19 cases in November and climbed to new all-time highs. Investors see the economy recovering and a new economic cycle beginning. If life gets back to normal by mid-2021 with herd immunity and widespread vaccinations, pent up demand could be unleashed in a big way, furthering economic and stock market growth ahead.
Happy holidays and Merry Christmas!
We wish you health and happiness in 2021. With all that we’ve been through this year, it’s a great time to reflect back on how lucky we are to be living in this great country, to be thankful for all the blessings we have, and to be grateful for all that is good in our lives.
It has not been an easy year by any stretch. First, we had the lockdowns, then we had a very deep recession and now a spike in the virus. We are hopeful that 2021 will look very different than 2020 and we can all get back to handshakes, hugs, and face to face meetings soon.
On behalf of everyone at True North Retirement Advisors, we thank you for having the confidence and trust in us to navigate you through these difficult times. While it’s always the darkest just before dawn, the future looks very bright!
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The views outlined in this newsletter are those of True North Retirement Advisors (TNRA) and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for a given client or portfolio.
Investing in stocks includes numerous specific risks including the fluctuation of dividend, loss of entire principal and potential illiquidity of the investment in a declining market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Any questions regarding the applicability of any specific issue discussed above should be addressed with TNRA. All information, including that used to compile charts and/or tables, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.
Moreover, you should not assume that any discussion or information contained in the newsletter serves as the receipt of, or as a substitute for, personalized investment advice from TNRA or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with TNRA or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but TNRA has not verified its accuracy and does not guarantee its reliability.