2020 was one of the most volatile and chaotic years in market and economic history. And yet, despite all the volatility, by the end of 2020 markets had not only recovered from their dramatic decline in 1H20, but finished the year at fresh all-time highs, driven in part by the massive amounts of monetary and fiscal policy stimulus. Headed into 2021 we think economic growth momentum can persist and push markets higher, especially as consumer confidence recovers and COVID vaccine distribution broadens. However, with inflation likely to rise, and broad market valuations reflecting peak-earnings growth, we caution investors against broadly adding risk to portfolios and suggest balancing sources of risk in portfolios.
Exhibit 1: S&P 500 Performance in 2020
KEY POINTS
2020 market rally likely to extend into 2021 as economic activity ramps up
- The S&P 500 finished 2020 up 16%, a 68% recovery from its low in March; we are optimistic for 2021.
- Future growth trends are highly contingent on a successful COVID vaccine roll-out and easing social distancing restrictions.
- The additional $900bn COVID stimulus bill should help support the labor market as the services sector ramps up in 1H21.
- The yield curve is steepening and the economy is recovering, key catalysts for inflation in 2H21.
- Housing momentum is likely to persist as lifestyles change post-COVID.
- The inauguration of Biden as US President in January should dampen policy-driven market volatility.
The 2020 US Presidential election is (almost) behind us, another round of COVID stimulus has been approved, and the incoming Biden administration is likely to support additional economic stimulus. Amid these developments, and with the tail-risk events of 2020 behind us (e.g. policy uncertainty, US election), we are optimistic headed into 2021.
The rapid development and deployment of COVID-19 vaccines should help drive strong economic growth as inoculated consumers reignite economic growth, especially given pent-up consumer spending and demand for travel and entertainment activities. And with the Fed likely to maintain low rates through 2021 we see limited near-term credit cycle-risks.
We expect positive returns to persist across most asset classes in 2021, and favor a risk-on tilt in portfolios, especially in smaller capitalization stocks and those in the growth sector. That said, we don’t expect a repeat of the elevated market returns experienced in 2020. And while we think service sector companies will see recovery in 2021, we believe investor preference for technology companies and the changing composition of the S&P 500 toward technology will provide further tailwinds for growth-oriented companies.
Lastly, we remind investors to keep risk in perspective, especially in the context of their overall portfolio. Historically markets are most volatility in the first quarter of a new presidency, and so we caution that there may be some dumps along the way.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.