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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 +.32% YTD through 1/15/21)
The S&P 500 Index ended 2020 at an all-time high, gaining +16.3% for the calendar year. That is remarkable given the fact we went into a very deep recession earlier in the year.
What made this recession different is that it was an exogenous event that caused it – the coronavirus. An exogenous event is similar to an earthquake or hurricane that influences economic activity for a short time, but then results in a V-shaped recovery like we‘re experiencing now. Given these circumstances, we are hopeful that the economic recovery will be faster and stronger than what typically happens in a recovery following a recession.
Despite the strong ending to the year, stocks could struggle in the early part of 2021. There is still much uncertainty about the coronavirus and the vaccination rollout, and stocks could be bumpy over the next few months.
In addition, the strong momentum leading up to the end of 2020 pushed stocks well above their 200-day trading range. This could result in some early 2021 profit taking and a drop in stock prices. If we do get a pullback, we will be looking to rebalance client portfolios and deploy cash into stocks, where appropriate.
As we look ahead to 2021, we see several positive factors that could propel stocks higher:
✅ There is tremendous pent-up demand that will be unleashed when we can safely go back to living our lives.
✅ Consumers have $1.4 trillion of extra savings and more stimulus checks are on the way. This should help support families and businesses until the economy fully re-opens. Those savings will likely fuel more consumption and stock purchases.
✅ New orders, minus inventories, have significantly increased, which is usually a leading indicator of rising future S&P 500 earnings.
✅The Fed announced that they will continue to buy $120 billion of government securities each month heading into 2021. This unprecedented infusion of capital into the financial system provides huge support for stocks.
We are also cautious about a few of the stock market “darlings” from 2020, which have skyrocketed to new heights. Valuations among some of the big tech and consumer brands are looking stretched, and we believe that money will flow into high quality dividend payers as well as some neglected areas, such as cyclicals, financials, and small cap growth companies as we embark on an economic recovery in 2021.
There is a restored sense of hope in the economy with multiple vaccines coming to market combined with herd immunity. This should allow the economy to re-open and help life get back to normal later this year.
As we move from extreme pessimism to massive optimism, GDP could increase 6% this year (which would be the fastest growth in 35 years). Accelerating GDP could result in a significant rebound in corporate earnings, capital spending, buybacks, and higher dividends.
Finally, merger & acquisition activity will likely pick up, as companies use cash they’ve built up to increase market share.
If growth is too rapid, we could see interest rates rise and renewed 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.
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 closed out 2020 at an all-time high thanks to the swift and impressive rollout of a vaccine in record time. Stocks could struggle in the early part of 2021 due to profit-taking and if the rate of vaccinations is slow. But there are some very strong tailwinds that should kick in by the second quarter – tremendous pent-up demand, $1.4 trillion of extra savings, and a Fed that is buying $120 billion of government bonds every month.
Last week, we celebrated True North’s 3rd birthday! Not exactly how we envisioned this party, but we had a good time regardless. Thankful for amazing co-workers, wonderful clients, and a fresh start to a New Year… Cheers! 🥂
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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.
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