Where do I start? Yes, 2020, is over. The year of COVID. Will 2021 be the year of the vaccine/recovery? Looks that way. From the 10,000-foot level, it looks like a “perfect storm” for the Bulls. Let me quickly point out what we are looking at:
- The Fed has stated that it will keep interest rates low to at least 2023. Maybe longer. Low rates stimulate borrowing and growth. Great for equity investing, but bad for bonds.
- Almost 3 Trillion (with a “T”) in monetary stimulus. This has never happened before. This is not wind at investors back… it’s a hurricane!
- Vaccines are out… more to come. It’s not the end, but it sure is getting better. And don’t forget about the new therapeutics and treatments. Less hospitalizations on the horizon. Long battle yet.
- Pent-up demand. See #3 above. Travel, vacations, entertainment, etc. Just getting to sit down in a restaurant or going to the gym. More job recovery.
- Lower U.S. dollar. A lower dollar makes our goods more attractive to foreigners. More exports. As long as the Fed keeps rates lower (see #1), the dollar will remain lower.
From the list above, this is not just limited to the U.S. – it’s Global. We have never seen a worldwide combination of fiscal and monetary stimulus before. Most experts are looking for the S&P 500 to be up 10 – 12% in 2021. If you look at the graph below, the corporate profit picture is bullish for the next 2 years.
We believe the Dow could hit 35,000 this year. Note: the “problem” could be we are not bullish enough (although I cringe when I say that!). Of course, we will have the “unknown” events, the “black swans.” Last March and April was a great example. Heck, there could be another COVID out there. If history is any guide, we will have a few 5 – 7% corrections, and one or two 10 – 12% corrections. But it sure looks good here at the start of 2021.
I do want to make a couple of points. The first one is on politics. Never, never, never compare politics to corporate profits. I had numerous calls in and around October wondering if we “should go to cash.” You know who you are! LOL! Luckily, nobody did, and November was up 9% and December was pretty good too. ‘Nuff said.
The second is diversification. That is a must. Yes, we are in a “risk-on” environment, but the proper diversification is a must. We got lucky last few years staying away from Value and International. But the markets are ‘evolving.’ Value is not a play… yet. International is looking more attractive, especially Emerging Markets. This could be a big year for Emerging Markets – weak dollar, China coming back, etc. My point, this may be a year where good asset allocation may make the different between a good year and a great year. Take a look below at Chart #2.
One note of caution, there will be a BIG problem down the road, 2 to 3 years… maybe longer. These stimulus programs are not free. While we have low interest rates, we can finance our debt… barely! Once we have inflation, and we WILL have inflation, this will be a serious problem. If interest rates go from 1% to 3% our interest expense on our debt triples. We will be discussing it further in future newsletters. But for now, enjoy the sunshine.
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Brian Craft, AIF
Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss. These are the opinions of Brian Craft and not necessarily those of Cambridge. The views expressed herein are for informational/educational purposes only and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.