- Nearing the apex of COVID-19
- Reasons for market optimism
- What’s on our wall of worry
Exhaustion and boredom are two words that could describe 2020 for most people. We are exhausted from endless video meetings, standing in line to get into stores and work-from-home schedules that see many people literally living at the office. We are bored of staying inside, socially distancing and from not being able to participate in most of the social activities that make our lives richer. We are happy to see the end of 2020, but will 2021 be any better? We think it will be – eventually.
Right now, we are in peak COVID-19 in much of the world. Many countries (including the U.K., Canada and the U.S.) have not seen case loads this high since the start of the pandemic. Daily death counts are also at, or near, highs. This is undoubtedly bad news. Given what we know of the virus, cases will continue to remain elevated for several weeks as a consequence of increased travel and activity over the holidays. However, the good news is that we are likely near the apex of the crisis.
There is light at the end of the tunnel as vaccines are now being distributed on a wider scale. Although the process has been slower than expected in many areas, health officials will learn and get better at distributing the inoculations to the public. As we move into February, we should see a decline in cases and deaths. Lockdowns will be lifted. The spring will start to see a gradual return to normal, which will only accelerate as we go through the year.
Reasons for market optimism in 2021
Last year turned out to be a much stronger year for investment returns than most were predicting in the lows of March. For well-diversified portfolios, 2020, as a whole, looked like a fairly normal year with solid returns. Investors were well compensated for staying the course and not panicking in the chaos of March.
As we look into 2021, there are many reasons for optimism. Forecasts are for a synchronized global economic expansion. Economic growth in 2021 should be well above average before tapering down towards a more normal run rate thereafter. This should support strong corporate earnings growth and lead to stock market gains. Investors can also take comfort in the fact that interest rates are low and that central banks are committed to keeping them there for an extended period.
In the U.S., the Democrats unexpectedly won the triumvirate of House, Senate and Presidency. This should ease passage of fiscal stimulus bills. At the same time, the narrowness of the win argues against passage of more controversial bills including bills to increase taxes. At least in the short term, this should provide some tailwind to the U.S. economy and equity markets. Although we may see market leaders change, for instance, a shift in spending from consumer goods to services such as travel and dining out, the overall backdrop is very constructive.
The wall of worry
While we anticipate a good year in 2021, nothing is guaranteed as the market always climbs a wall of worry. As investment managers, we are always asking ourselves what could go wrong so that we can plan for how to best minimize possible risks. Obviously, the pandemic tops the list. A positive view of 2021 depends on effective vaccines, an efficient rollout, and the virus itself not mutating into a more deadly or vaccine-resistant strain. Right now, investors are assuming that we will have the pandemic under control in a relatively short period. We agree, but are watching the situation closely.
We are also keeping an eye on the U.S. political situation. The chaos in Washington on January 6 has actually lowered this as a concern for us. It seems to have solidified the peaceful transfer of power to President-Elect Biden, as Republicans back away from President Trump’s attempts to change the election outcome. The next few months will be critical to see whether the U.S. moves down a path of healing or further division.
Other items on the wall of worry list are the handoff from government assistance to the real economy. What if it falls short of expectations? In addition, valuations are not cheap and we have seen some areas of the market, especially in technology, at frothy levels. Valuations always matter in the end and we remain vigilant in analyzing the investment opportunities that are within our portfolios. Finally, we are watching the rapid increase in government debt levels, but agree with the market sentiment that while this is an issue, it is an issue “for another day”.
We are hopeful that 2021 will be both personally and professionally richer for many people. While many opportunities and risks lie ahead of us, we remain cognizant that the biggest risk is always what you do not anticipate. COVID-19 is the perfect reminder of that. The best protection against this risk remains a solid discipline, diversification, and strong planning.