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The Morning After -The Outlook for a 2021 Recovery

Steve GibsonJanuary 8, 2021

Markets

The 1973 Oscar for best music was given to Maureen McGovern for, “There Has to be a Morning After,” the theme from the Poseidon Adventure, a disaster movie about a cruise ship flipping upside down.  Among the lyrics;

There’s got to be a morning after
If we can hold on through the night
We have a chance to find the sunshine
Let’s keep on looking for the light

The pandemic of 2020 felt like parts of the economy and markets were upside down. 2020 was more like a natural disaster because it was felt around the globe and many of its multi-layered changes will be felt for a long time. Markets have concluded that 2021 will offer the bright light of likely recovery from the relentless economic and social damage of the Coronavirus pandemic. Markets should move back in line with economic drivers of supply, demand, and earnings. After a decline of 3% in the economy in 2020, we are expecting a 5%-6% growth in 2021. Earnings should be up double digits. It will not be a steady climb and markets may be highly volatile. The slow roll out of vaccines, the weaker than expected government stimulus and considerable structural damage to the services sectors will make timing difficult. The year may open soft for stocks because many investors are sitting with appreciated stock they waited until after year end to sell. For a long-term retirement investor, this softness is a buying opportunity. In our last update, we forecasted that with stimulus, Fed actions, and a potential vaccine, stock markets would overcome the pandemic and the election uncertainty. That proved correct. Stunning vaccine effectiveness drove stock markets even higher than we expected. Those same forces, along with multiple vaccines, are very bullish for later in 2021.

In 2020, we made several transactions within client accounts in anticipation of many unknowns.  We feel these moves helped our clients to reduce risk, focus on the profitable sectors and provide reasonable risk adjusted returns.  We were very pleased with our investment results given the status of the disease, the economy and the election.

2021 will provide clients many opportunities and challenges.  We see an opportunity in small and mid cap stocks as well as value securities and we will be making some minor adjustments in these asset classes.  Finding yield and total return in our fixed income investments will be our biggest challenge. Fixed income did the job of offsetting dramatic stock declines in March by rising in value as real rates fell to near zero early in 2020. The secular impact of aging America and technology both have held down inflation and interest rates. The Fed and government stimulus in March were 20% of GDP. During the last quarter of 2020, with the passage of another spending package, we finally saw interest rates begin to rise. The Democratic gains in the Senate should result in another stimulus package at least as large as the one just passed. We expect at least $1 trillion in additional spending. In 2021, more government spending, a recovering economy and enormous pent-up demand, should lead to a short-term rise in inflation and interest rates that will not be positive for traditional fixed income.

We will be actively managing to try to retain the protection of fixed income while shifting to some new holdings to get a meaningfully higher yield. The next few years will call for smart and timely new holdings to adjust fixed income strategies to new realities. Watch for more information and education from HFA on this important topic soon.

In the Poseidon Adventure, the survivors struggled most with their fears. 2020 was the same for investors. Those that trusted their diversification and did not panic increased wealth significantly. Unfortunately, most American investors actually missed out by pulling funds out of stock funds. HFA consciously tries to maintain a portfolio that let’s clients sleep at night when things seem uncertain. 2021 looks like another year when looking past fears of short term volatility will pay big dividends longer term.

As always, please contact your financial advisor if you have any questions or concerns about your investment portfolio and how it impacts your financial plan and goals.  Happy 2021 to all and thank you for the privilege of guiding your portfolios.

 

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