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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 +4.18% YTD through 2/17/21)
Stocks have been on a tear since the election. From November 3rd through February 10th, stocks have risen 13.5%. That’s the best market performance by any first-term President going back to World War II, for this time frame.
And now we are seeing the pace of infections, hospitalizations, and deaths falling, signaling that the worst could be behind us. In the coming weeks, we may start to see the effects of more widespread vaccinations and herd immunity, helping improve those numbers even more.
The good news for the stock market is that the recovery is well underway, and we believe this current bull market still has further to go. Over the next two quarters, profits should be very strong as business and economic activity normalize.
The combination of huge pent-up demand and $1.4 trillion in extra savings among Americans, should drive consumer spending and corporate profits. With further good news on vaccine development and additional stimulus likely on the way, stocks look like they want to continue moving higher!
SPECULATION GRIPPED WALL STREET
Speculation on the part of “Reddit rebel” investors rattled the markets in late January. Investors banded together and targeted several heavily shorted stocks, including GameStop and AMC.
As the momentum built and more people jumped on the bandwagon to buy these shorted stocks, the shorted companies stock prices started skyrocketing. But, in the end, regulators and market facilitators demanded more capital protection and raised margin requirements and restricted trading. That brought the speculation down to more reasonable levels and conditions normalized.
Luckily, the damage was limited. But it will be interesting to see over the coming months if this becomes a trend or even if more regulation tries to curtail speculation in the markets – both on the part of large institutional investors and rogue rebels.
Interested in learning more about the biggest stock market news event so far in 2021? Watch our video: Making Sense of the GameStop Stock Manipulation >>
In 2020, the U.S. economy shrank for the first time since the financial crisis – dropping 3.5%. That’s the worst year since the 1940s.
However, in the second half of 2020 when the lockdowns eased, the economy started to recover. Thanks to more widespread vaccinations and stimulus, the economy should gain strength in the coming months.
With $1.4 trillion in extra savings and pent-up demand, consumer spending could rise 9% in 2021. That would give GDP a huge boost – raising output to 6% – which would be the fastest GDP growth rate in 35 years.
If we do get a significantly higher GDP growth in 2021, that could result in a strong rebound in corporate earnings, capital spending, buybacks, and higher dividends.
In addition, we think you will see a spike in mergers & acquisitions, as companies use all the cash they’ve built up to increase market share. But rapid growth could cause interest rates to rise and that could put pressure on market valuations.
In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:
Over the last decade, U.S. stocks have significantly outperformed their overseas counterparts. The S&P 500 Index has averaged 14% total return over that period vs. just 4.7% for non-U.S. stocks. But if the global economy recovers in 2021 and the dollar continues to fall, overseas stocks could outperform. Relations with China should improve under the Biden administration & innovation is occurring across the globe.
SMALL CAP STOCKS
One of the areas that has underperformed large-caps during Covid-19 are small-cap stocks (companies with market caps between $300 million – $2 billion). Small caps were disproportionately hit on the way down and we expect these companies will bounce back stronger if the economy recovers in 2021. In fact, the Russell 2000 small cap index soared +18.3% in November and another +8% in December.
When the economy starts to recover, these smaller companies tend to outperform large-caps by a wide margin, which presents an opportunity at this stage of the recovery.
Stocks have been on a tear since the election. Infections, hospitalizations, and deaths are falling sharply. With further good news on vaccine development and additional stimulus likely on the way, stocks look poised to continue moving higher.
The children and fur babies of True North enjoying Oregon/Washington’s Iceapocalypse 2021. It wasn’t quite the snow we were hoping for, but if you can sled down it, we won’t complain!
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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.