When my clients ask me for my 2021 Market Outlook, I gently laugh and say, “Well, let’s hope it is more accurate than last year’s.” On January 6, 2020 I noted that the upcoming year would likely be a “decent one” for the US economy. At the time, that statement seemed like a pretty safe bet.
I recently heard that there is a movement afoot to do away with market outlooks, since they are so ephemeral and, at least in 2020, were so inaccurate. But outlooks are important. After all, many of us who are investment managers, base their portfolio positioning on the facts and figures underlying these outlooks. When our economic outlook changes, so does our view of risk, and adjusting portfolios to manage risk is what we do. So, I offer up my market commentary on our current investment outlook, with the caveat — like New Year’s resolutions, it will need refinement.
But first a little backdrop:
StrategicPoint started last year (2020) with our portfolios in a somewhat defensive position. While our equity allocation was neutral for all of our models, some of our equity funds were designed to mitigate volatility while others focused on growth. At the time we felt that 2020 was going to be a decent year for the economy. The (then) recovery was getting long in the tooth, and we wanted to add a bit of caution to our portfolios. We weren’t thinking about a pandemic. Its arrival only added to our view of heightened portfolio risk. In a sense we were a bit lucky, only having to make a few careful changes to the portfolio as the pandemic unfolded.
Broadly characterized, last year the economic outlook was one of a series of uncertainties. Risks were high, even as the stock market looked beyond the challenges of the present. By the end of the year, however, one by one the risks were replaced with greater clarity.
The boxes we had checked included 1) the determination of the 2020 presidential winner 2) promised continued monetary support from the Federal Reserve 3) better than expected corporate earnings 4) a relief package designed to bolster those who had fallen behind 5) two vaccinations that were deemed effective in combatting COVID 19.
As we reviewed the data, we uncovered other positive news: personal bankruptcies are actually down compared with previous recessions, thanks to the CARES ACT, while innovation has accelerated (just look at the healthcare field) and business start-ups are ahead of schedule. In addition, many people have added to their savings as a result of last year’s mobility restraints. Increased savings sets the stage for unleashed pent up demand, as the virus gradually gets under control and consumers reclaim old spending habits.
In December, as a result of the changing economic outlook and a reduction of known risks, our portfolio committee added to our equity holdings in each of our models and prepared to rotate into more cyclical sectors of the economy that can benefit from a strong economic rebound. Thus, we started the year with the view that 2021 could truly herald better times for Americans.
But what would an outlook be without the naming of new risks? Here are a couple of mine:
My first concern is that the virus outsmarts us. Until and unless we have a successful and ongoing vaccine inoculation program, a future mutation of the virus could grab a foothold in our society and prevent us from fully experiencing normalcy. While I suspect we might never rid ourselves of COVID completely, we still need to manage the virus sufficiently in order to fully allow our economy to recover.
My second concern is that we might not finish what we started. Last spring’s CARES ACT and December’s Consolidated Appropriations Act of 2021 were designed to help keep individuals and families afloat until the economy turns the corner and the virus is controlled. The goal has been for the US to come out of this pandemic crisis as economically strong as we were when we went in, being mindful that the virus has not punished Americans equally.
As of this writing, there are still close to 10 million more people unemployed now than before the pandemic started and 2.3 million more people who are below the poverty level than were in February. We have also seen an increase of 2 million more delinquent mortgages since the start of the pandemic and many more people behind in rent. I fear we may strand those disadvantaged by COVID approximately 90% of the way across the fiscal bridge to the post-pandemic world. We need to continue to find ways to shore up the unemployed, low-paid workers and small businesses to give us all an opportunity on the other side.
And finally, like many people, I worry about the growing federal debt due to recent tax cuts and this year’s pandemic relief spending. While the mountain of debt is unlikely to haunt us this coming year, and probably not until higher interest rates have set in, it is not too early to begin addressing this potential problem. (I am also not a fan of modern monetary theory as artfully explained in our Novice and the Nerd’s recent podcast.) A powerful way to alleviate debt distress is through strong, economic growth. I am hopeful that our country will use the opportunity of this recovery to spur growth by investing in jobs and businesses. Whether this investment is through retraining, infrastructure spending, alternative energy advancement, healthcare research and innovation or other forms of large and small capital expenditures, these efforts can strengthen the economy and, more importantly, promote its sustainability.
There is much our country can do in the coming year to repair the damage from the pandemic and fulfill 2021’s promise of a new, brighter beginning. And when you ask me next January what our outlook for 2022 will be, I hope to be able to say, “As good as last year’s and maybe better.”
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