VIDEO: It Was a Very Good Year (For Investors)
Welcome to my first video presentation of 2021. In the article below, I delve into greater details.
As my favorite crooner might sing, it was a very good year. (For investors, anyway.)
The stock market plunged in February through March, when the coronavirus pandemic first became apparent in the United States. Stocks posted the fastest bear market in history. At their nadir in late March, both the S&P 500 and Dow Jones Industrial Average were down more than 30%.
However, when monetary and fiscal stimulus measures were implemented by the Federal Reserve and Congress, respectively, investors took heart and we experienced the fastest recorded recovery from a bear market. With breakneck speed, we went from bull to bear and back to bull.
It was an astonishing stock market recovery and, despite volatility and dips along the way, global stocks continued to rally until the end of the year (see table).
Unemployment remains high, a slew of businesses are either shuttered or deeply in debt, and the deadly coronavirus still bedevils public health and the economy. But as I’ve explained in previous articles, the stock market and the economy don’t move in synchronized tandem.
The chumps versus the champs…
Markets are forward looking and Wall Street expects a bountiful 2021. Optimism is underscored by the roll-out of new COVID-19 vaccines.
This bull market has made chumps out of the bears. Last week’s holiday-shortened trading saw both the Dow and the S&P close at record highs, after Congress passed additional unemployment benefits and stimulus checks.
The three main U.S. stock market indices finished sharply higher on December 31, the last day of trading in 2020. In pre-market futures trading on January 4, the three indices were poised to start the new year in the green.
Last week also saw the signing of a hard-fought Brexit deal between Britain and the European Union. Details still need to be hammered out, but essentially the Brexit agreement imposes no quotas and no tariffs on trade between the U.K. and E.U. That’s remarkable considering the political havoc Brexit has wreaked since Britons in June 2016 narrowly approved a referendum to leave the trading bloc.
Brexit reached a conclusion last week with a whimper, not a bang. That’s unexpectedly good news for investors. It’s also a reminder that global capitalism is resilient and you should never overreact to dire headlines.
In the U.S. on the economic front, the U.S. Bureau of Labor and Statistics reported last Thursday that initial jobless claims were significantly below consensus estimates and the previous period. Initial numbers showed 787,000 new jobless claims, down from a revised 806,000 the previous week.
As 2021 gets underway, I expect stronger economic growth, a more confident consumer, a continuing housing market recovery, steadfast support from the Federal Reserve, faster corporate earnings and revenue growth, the waning (eventually) of political instability, and more stimulus spending. In other words, conditions are ripe for a secular bull market in 2021.
Add to the list of positives technological innovation, not just in work-at-home digital technologies but also in renewable energy, health services, virtual/augmented reality, robotics, artificial intelligence, autonomous vehicles, and the Internet of Things. Facilitating these tech wonders will be the global roll-out of 5G wireless technology (more on 5G, below).
Consumers have been saving at a high rate during the pandemic and they’ll soon be in a mood to spend that cash. The past year has been emotionally tough for most of us and the coronavirus continues to pose a threat. However, I’m confident that an economic and social renaissance awaits in 2021. In the words of billionaire super investor Warren Buffett: “Never, ever bet against America.”
Not just the U.S. but the rest of the world should see a significant jump in economic growth this year, as vaccines kick in and national economies re-open (see chart).
I also expect the stock market rally this year to have broader shoulders. In 2020, a handful of U.S. mega-cap technology brand names accounted for a disproportionate share of market appreciation in 2020. As the economic recovery accelerates this year, sectors and asset classes that have lagged are likely to pick up the pace.
Specifically, the rally should broaden to include small-cap and international stocks, as well as economically sensitive cyclical sectors. As the following chart shows, the small-cap focused Russell 2000 Index beat the S&P 500 in 2020:
Make sure your portfolio is diversified, to take advantage of the rotation of leadership across sectors and asset classes.
In particular, maintain exposure to small-cap stocks, which are poised to continue their outperformance in 2021. Over the long term, the small fry on average have dramatically outperformed all other types of stocks.
A major tailwind for equities of all sizes this year will be the continuation of low interest rates. The Federal Reserve has indicated that it will keep rates low into the foreseeable future. This policy is unlikely to change, even as growth recovers, because there’s still bound to be sufficient slack in the economic and jobs market to warrant central bank support.
Ring in the new…
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