"The wise investor recognizes that success is a process of continually seeking answers to new questions." John Templeton
2020 has proven the above quote to be one of the most insightful I have ever come across. This past year has at times knocked our knees, challenged our resolve and, on a few occasions, even made us question our core investment beliefs. I'm most proud of the WT Wealth Management investment team for its unwavering hunger for self-examination and not becoming complacent with what worked yesterday or assuming it will continue to work tomorrow.
We thank each and every client for allowing us to navigate this journey together with you.
2021 - A Look Ahead
Now that last year is behind us all, what do we anticipate for 2021?
We are optimistic about getting to the other side of the COVID-19 pandemic. It will be nice to once again have companies evaluated on proven and time-tested fundamentals and not simply based on whether they are labeled as a "stay-at-home" stock or an "out-and-about" stock.
The stock market ended the year at new peaks and investor optimism has become widespread. Unfortunately, investor optimism increases the risk that bad news could cause a sharp near-term reversal. There's an old saying that goes, "when every investor is fearless, it's time to get fearful."
In fact, we do anticipate a short correction in early 2021 much like we saw in September of 2020 when the S&P 500 had an inter-month correction of nearly 10%. Corrections are welcome and healthy - in fact, they're a part of investing.
However, by year end we expect that 2021 will be a very good year for equities. S&P returns in the low- to mid-teen range would not surprise us at all.
Economy: Better Days
Throughout 2020, The Federal Reserve's monetary policy was the stock market's heavy lifter. That, along with the market's forward-looking tendencies, have allowed stocks to quickly span the 30+% drop that was created by the COVID-19 pandemic in March. Government fiscal relief, and the human ingenuity associated with the high-efficacy vaccines arriving daily, have provided optimism for consumers and the broader economy for 2021.
For 2021, a series of potential economic catalysts, including: easy monetary and fiscal policy, pent-up consumer demand, and a successful COVID-19 vaccine rollout should allow for a consistently expanding Gross Domestic Product (GDP). In fact, on December 28th, Goldman Sachs upgraded Q1 2021 GDP forecast to 5% after the latest $900 billion stimulus bill passed. (1)
Fixed income: Higher Yields
2020 was a year in which the Federal Reserve led the response to the COVID-19 crisis, pushing interest rates lower and rolling out a variety of programs to help support the economy.
With Fed intervention eventually subsiding, we consequently see the 10-year Treasury bond yield inching higher to a range from 1% to 1.5% in 2021. These new yields will result from real economic growth and some modest inflation pressures.
The prospect of rising interest rates tends to make bond investors wary, as higher rates typically mean lower bond prices, all else being equal. At the same time, higher bond yields can be viewed as an opportunity to reduce equity exposure within investment portfolios. When bond yields rise, it offers the chance for investors to capture more income from interest payments without necessarily taking on more risk.
Equities: The Rotation Story
Our clients often ask about the perceived disconnect between the stock market and the economy. To a large extent, this unique gap reflects an economy that saw a handful of "thrivers" during the pandemic, while the majority of companies and industries were in a very challenging business environment.
For a large part of the year, the top five largest stocks in the S&P 500 by market capitalization - Apple, Microsoft, Amazon, Facebook and Alphabet/Google - massively outperformed the other 495 stocks. At their early September peak, these five stocks represented nearly 25% of the S&P 500 weighting, so their hefty outperformance lifted the overall index. (2)
However, since mid-September the markets have experienced rotations into other sectors - not just the "thrivers". Sentiment has shifted from stay-at-home stocks to get-out-and-about stocks, from large-cap to small-cap, from growth to value and from defensives to cyclicals. Looking ahead, we expect sector rotations to continue, largely driven by virus-related news about economic activity and a change in governance from the White House.
Recognizing that we may be in the minority, we feel that human behavior does not change quickly. People have adapted over the course of 2020 to stay-at-home routines. While there is likely substantial pent-up demand in some sectors of the economy, we expect the return to pre-pandemic normal consumer behaviors to be slow and steady. We all understand that normal has been redefined and some things will never be the same again.
As we said at the opening, our success and yours will be based on "continually seeking answers to new questions." New questions abound. We're committed to seeking the answers.