The dichotomy between the strong performance of the markets in 2020 (S&P 500 Index 18.4%) and the hunkered down, pandemic economy was striking, but not completely surprising. For decades now, uncorrelated financial returns have so far outpaced growth, profits, and disposable incomes. And while portfolio results of 2020 left many of us with the uncomfortable optic of having profited in the face of a high human toll, we submit that financial markets are not moral actors but only a reflection of the supply and demand for current liquidity versus future expectations. In shuttering our Service Sector, economic activity fell and pushed up savings. The Federal Reserve’s actions in March (lowering interest rates to zero and supporting Corporate and Municipal Credits) drove bank balances into stocks – and the rest is history. The lesson is that dark circumstances inevitably mean the future is what we have for better times and now valued highly even more.
Currently, this leaves us with a roll out of vaccinations far behind schedule, and a recovery dawdling as well. With recent modest fiscal action risking deeper economic damage, a new Administration is expected to push for “more” while the Federal Reserve is expected to keep rates low. If we are lucky, some portion of “more” will consist of infrastructure to fuel the productivity of future periods. If not, our definition of luck narrows to a brush with inflation.
For our summary outlook for 2021, we are currently sanguine that things are looking up:
- Economic Growth: With China and the U.S. both set on expansion, the relationship may change for the better with less Tariffs and new trade agreements. In addition, vaccinations should drive higher employment leading to a pick-up in household incomes and a curtail or shift in government assistance.
- Dollar Exchange: Weak exchange rates could strengthen earnings and add support to stock valuations, yet this will take longer than desired as the consequences of “renewing foreign alliances.”
- 2021 Stimulus: Monetary policy supporting low interest rates will hold in addition to more stabs at fiscal spending. These efforts most likely will continue in 2022 or 2023 before regaining to pre-pandemic economic levels.
- Allocation: Stocks remain a favored asset. Key alternatives face higher valuations with challenging prospects (Bonds and/or Commercial Real Estate). Minor shifts favor Small Cap; and a tug of war with Value, Cyclicals and International stocks has promise, but we think our “Quality Growth” part of the market keeps its legs.
- Returns: Stocks could perform consistent with Investment Plan expectations of 7% to 8% to score a third positive year. But overall, our Balanced Allocation Investment Plan expectations for the year are little changed from 2020 (5% to 6%).
Our firm has experienced many business cycles over the last 35 years and, while the current one may have its differences and challenges, we remain confident that our balanced portfolio management approach using quality securities will continue to be validated by the Market over the months and years to come. As always, we welcome the opportunity to discuss our expectations, your circumstances, and the track of your progress together during an Annual Review via Zoom Meeting or phone call.
James W. Mersereau, CFA, CIC
Daniel A. Kane, CFA, CIC