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In typical 2020 fashion, the market continues to amaze investors. The tears of fear from March and April have turned into tears of joy. In our last newsletter, we made two ascertains and here is what happened.
We said: “Many are concerned this might be the start of a larger correction, but we do not believe so. 10% corrections in the S&P 500 happen on average every 11 months, and on average recover in 101 days. We think it will be much quicker this time, as rapid declines and recoveries seem to be par for the course this year.”
What happened: After close to a 10% correction in 21 days in September, the S&P 500 made a new high on November 13, 51 days later. The result was a 72 day roundtrip to a new high.
We said: “We see a 10-15% return for stocks over the next 12 months, which would be average for the second 6 months of a new bull market historically.”
What happened: From October 1 to December 8 (the day of writing), the S&P 500 returned 10.1%.
Turning to client portfolios, we trimmed our position in the S&P 500 in retirement accounts and added a small position in gold the week of Thanksgiving. While there are many reasons that could be made to include gold in portfolios, here are the top 3 for us: diversification to stocks, record monetary stimulus globally, and store of value vs. U.S. dollar. For 2021, we plan to add to areas we see having continued benefit as the economy reopens: US Industrials sector, small US companies, and emerging markets.
Statistically, no one knows what the market has in store for 2021, but Wallstreet is extremely optimistic. Year-end targets for the S&P 500 range from 3,800 to 4,500, projecting a gain of 2.7% – 21.5%! While we do not know exactly where it will fall, odds are you would rather be in the game than sitting on the sidelines.
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We have the opportunity to piggyback onto LPL Research’s Outlook 2021 for this section of our newsletter. Here are their major themes for 2021:
COVID-19: Over the course of the year, we have seen an increased understanding of how to contain the COVID- 19 virus, important progress on how to treat those hospitalized, and promising developments on treatments and potential vaccines. Nevertheless, conditions have worsened heading into late 2020, with a record number of confirmed cases and increased hospitalizations. We believe we will see continued advances in 2021 that will further limit the impact of the virus by the end of the year, but it will be a process. In the meantime, the goal remains keeping the economy as open as possible while making sure that our healthcare system doesn’t get overwhelmed and the most vulnerable are protected.
POLICY: We expect global central banks to remain supportive and for individual economies to continue to refine their responses to COVID-19. In the United States, what will likely be a divided government may help limit the size of any tax hikes and regulation while still supporting additional fiscal stimulus that may include high-priority items for both Democrats and Republicans. We could also see movement toward a similar deal on infrastructure. Greater clarity on trade may make it easier for some companies to do business, but a more challenging regulatory environment may be an offset.
DOMESTIC ECONOMY: Continued progress in the response to COVID-19, including further stimulus, will be the key to sustaining the recovery. COVID-19 impacted service industries may be the last to bounce back. We expect some of the accelerated innovation that came with the COVID-19 response to have a positive long-term impact. We forecast 4–4.5% US gross domestic product (GDP) growth in 2021.
INTERNATIONAL ECONOMY: Emerging market economies may lead in a global rebound. We believe growth in international developed economies may lag behind the United States, although a strong fiscal response may help Japan. We forecast global GDP growth of 4.5–5%.
STOCKS: A strong earnings rebound in 2021 may allow stocks to grow into somewhat elevated valuations. Cost efficiencies achieved during the pandemic may persist. We see an S&P 500 Index fair value target range of 3,850–3,900 in 2021 with potential for upside with better-than-expected vaccine progress.
BONDS: Inflationary pressure is likely to be limited, and the Federal Reserve (Fed) is expected to keep rates low, but economic improvement and even normalizing inflation could put upward pressure on rates. We see the 10-year yield finishing 2021 in a range of 1.25–1.75% with a bias toward the lower end.
For a full forecast on 2021, click here.