It is that time again where we look to the future with our annual three predictions for global markets for 2021. As happy as we are to put 2020 in the rear-view mirror and look to the future, let’s still take a look at how accurate we were with our predictions for last year. Spoiler alert: we did not predict a pandemic or any of its very serious health- and social-related side effects that continue to impact our day-to-day lives.
Here is a recap for our 2020 predictions.
Prediction 1: We were bullish on the markets for 2020, looking for low inflation and global growth. COVID-19 had yet to force a global shutdown at that point in the year. We had seen a few signs of the virus’ economic impact, but at the time, it was still an epidemic and not a pandemic. Here is an excerpt of what we said, “…. Specific to the Coronavirus, we—like many—expect that any 1st quarter pullback will be met with a 2nd quarter snapback. This is referred to as a V-shape recovery. Other than a very ugly presidential campaign, we see no real political activity until after the election. The Impeachment was a non-factor. Don’t head for the exits on this market just yet. Remember (from a historical perspective) that during election years market are choppy at the beginning of the year only finish on solid footing.”
As for prediction 1, we severely underestimated the impact of the Corona Virus worldwide. We actually saw a global recession that called for Federal Reserve, Congress and Global Leaders to pump massive amounts of stimulus into the world’s economy to stave off the impact of the pandemic. As a result, the recession was actually the shortest on record for the stock market followed by the fastest market recovery in history. Markets actually reached new all-time highs during the height of the pandemic. As a firm we have rarely been more active in our client’s portfolios and it paid off as the short-term market dislocations provided buying opportunities for our clients throughout 2020.
Prediction 2: We saw quite a bit of opportunity in foreign stock markets. “…International markets will outperform the US broader markets… Sometime during the second half of the year, Corona will be contained and the global growth story will get back on track, which will reverse the strong-dollar trend that will benefit international markets.” We were off the mark here as well, believing that the Corona Virus would be largely under control by the 3rd quarter. Asia and Europe were hit the earliest by the virus, and they aggressively shut down their respective economies. Only in the last half of 2020 did we see both developed and emerging international markets really pick up as their respective countries reopened for business. We got a significant market boost in the 4th quarter as Pfizer and Moderna rolled out a vaccine giving us all hope of returning to normal someday soon. As a small consolation, we did get the declining dollar prediction correct.
Prediction 3: We were looking for the Federal Reserve to keep interest rate policy unchanged for 2020, as it would want to avoid any accusations of influencing the election. “… we don’t see any reason for the Fed to raise rates. With recently negative stock performance it appears that markets are pricing in at least one rate cut. We believe that the Fed would prefer to not make any changes to interest rate policies as to attempt to remain neutral during what is shaping up to be a very “interesting” election cycle.” By mid 1st quarter, the desperate state of the global economy tossed our election premise right out the window. In March of 2020 the Federal Reserve, led by Jay Powell, cuts short-term interest rates to zero and announced a new $700 billion round of bond buying to provide liquidity to US credit markets. This was part of an unprecedented and well-coordinated global effort to limit the negative impacts of the financial crisis caused by the pandemic.
So far 2021 has started off with quite a roar as market momentum from the 4th quarter of 2020 has carried over to the beginning of the trading year. So here is what we see for 2021.
- Weak US dollar and Strong International Growth, both in developed and emerging markets. As a result of the pandemic, we truly have global synchronous growth. Central bankers and politicians continue to be supportive with both monetary and fiscal policies. There is a tremendous amount of liquidity with more stimulus on the way that will find its way into global markets. As a result of their more aggressive measures to contain the spread of the Coronavirus, Asian economies in particular are positioned very well as the rest of the world prepares to fully reopen for business.
- In the near term we will look for “Value” oriented sectors to relatively outperform “Growth.” With long term interest rates moving up, cyclical sectors like financials and industrials, which fall into the “Value” category, are set to outperform. Historically, in a recovering and growing economy, value stocks tend to outperform growth stocks. This is also a departure from the better part of the last decade where it has been Growth led largely by the Technology sector leading the way. We see some head winds for Growth in 2021, specifically in the Technology sector. A pending investigation from the Department of Justice into Google’s business practices, as well as regulatory changes from the Federal Trade Commission for the likes of Facebook and Twitter, could certainly put downward market pressure on the sector. Don’t get us wrong, Growth is not dead. More specifically Technology is not dead, despite the near-term concerns. We see significant long-term opportunities in Semi-conductors, 5G technology and BioTech.
- Commodities to shine. We are not looking necessarily for oil and natural gas to go crazy, but as global economies reflate, we should see solid opportunities in the sector. We will be looking for better relative performance specifically in the areas of agriculture and industrial metals. We have already seen quite the rally as a result of expectations of a global reopening, and we believe this trend will continue for most of 2021. An expected increase in inflation (due to all the financial stimulus finding its way into the broader economy) and weaker dollar prices relative to foreign currencies will persist, directly benefiting the international and commodities markets.
One final observation: digital assets, or “cryptocurrencies”, are finding broader adoption among institutional investors. Cryptocurrencies are digital or virtual currencies created by computer algorithms. Bitcoin and Ethereum are two of the more popular digital currencies. They are not physical currencies issued by governments—instead they are mathematically generated on networks of powerful computers. For this reason, they have been of interest primarily to individual investors. More recently, however, interest among institutions has been growing. In 2020, one leading custodian began to custody Bitcoin for institutional clients, several well-known hedge-fund managers floated the idea of investing in cryptocurrencies, and the payments company PayPal announced that its users would be able to buy and sell cryptocurrencies.
So, there you have our predictions for 2021. We do believe that 2021 should provide investing opportunities with positives outcomes. One thing that could force us to rethink our optimistic outlook is the threat that inflation rises to higher levels than expected this year and stays there. This might force the Federal Reserve to rethink its position on holding rates at current levels, upsetting markets and dramatically increasing volatility.
As for now, we will continue to be optimistic.