What’s The Outlook For 2021?

What’s the likeliest scenario that plays out in the markets for 2021 and 2022?

For one, turn off your cable news networks. They will have you thinking short term because most of them do.

Personal feelings aside, my view remains that economic growth will accelerate in 2021 into 2022. We are not going to escape the “doom and gloom” feeling anytime soon, but we are certain to see a continuation of positive economic outlook . . . at least for the near term until our countermeasures run dry.

Rapid response coronavirus tests will roll out, permitting faster and safer openings. Coronavirus vaccinations will accelerate in the second half of 2021 into 2022. The Fed and all monetary bodies will remain all-in forcing investors further out on the risk curve. We will have several demand-focused stimulus programs and global trade will rebound.

Again, that’s the likeliest scenario I see. As 2020 showed us, anything can happen.

In my view, while the economy will not return to pre-pandemic levels until mid-2022, corporate profits, operating margins, and cash flow will exceed peak levels early in 2021 led by the financially strong, well-capitalized industrials, commodity, and transportation companies. Technology remains a significant portion of our portfolios due to their sensational long-term prospects selling at reasonable valuations with discount rates so low.

Things are undoubtedly going to be volatile, especially in the coming months, so watch for that and position your portfolio accordingly.

The stock market remained under pressure last week due to the failure of our government to reach a much-needed new stimulus package; a substantial increase in cases in Europe which has pushed the euro down as governments consider new shutdown measures; the Republicans’ push to appoint a new Supreme Court Judge further damaging relations with the Democrats; and Biden maintaining his lead in the polls. U.S stocks had their third-largest outflow last week with the money going into bonds and precious metals. Interestingly, gold continues under pressure too.

I get why investors are worried near term, but it does not alter my longer-term favorable view that the global economy, including the U.S., will improve sequentially as we move through 2021 into 2022 for all the reasons stated above.

Here’s the thing: it doesn’t make me happy to type this.

If anything, this just proves that we’ll see more instability — a trademark of overleveraged markets in need of addressing root issues.

It will help you to understand what’s happening if we discuss the driving forces at play here a little more.

Liquidity is what drives financial markets. The Fed and all monetary bodies will remain all-in for several more years providing liquidity far above the economy’s needs, pushing investors further out on the risk curve. Federal Reserve Chairman Powell testified before both the House and Senate Banking committees two weeks ago pleading for more fiscal stimulus as the Fed cannot go it alone. He mentioned that the Fed has many more arrows left in its quiver to support the economy through the pandemic. We should not take them at their word, ever.

To do so would be to believe that the Fed/Powell will keep their word that the Federal Funds rate will remain near zero for three more years, which plays right into the discount rate and valuation for the stock market. This means that stocks remain undervalued today . . . propped up on more and more plates.

But it doesn’t matter because number go up, right?

Let’s ignore the (irrational) market for now. How’s the economy look?

The US economy has continued to improve as we move into the fall, led by the manufacturing sector. The U.S composite PMI output for September was 54.4, the services index at 54.6, the manufacturing PMI at 53.5, and output stood at 53.3, a 10-month high. It was commented that “U.S. business reported a strong end to the third quarter with demand growing at a steepening rate.” Inventories throughout the economy continued to fall, placing the I/S ratio at a multi-year low, which supports my view that economic activity will continue to be mostly positive in the fourth quarter . . .  even without another stimulus bill. It helps that consumer deposits are way above pre-pandemic levels, and credit card debt is down. By the way, the consumer comfort indices have fully recovered, too, with expectations of substantial spending gains ahead. Again, we do expect additional stimulus bills after the election, if not earlier, which will boost economic activity in 2021 and possibly 2022.

I see a similar economic outlook abroad. While consumer spending may slow from the recent pace as outbreaks increase, the manufacturing sector remains strong as exports are improving, especially to China. Inventory levels are depleted, necessitating an increase in operating rates to build inventories back to normal levels. It’s not a stretch to expect an acceleration in growth abroad next year into 2022. It does help that all governments, including Germany, have passed major fiscal stimulus bills, which will support better days ahead, especially as rapid response tests roll out.

Yes, that disgusts me that stimulus is being seen as the panacea, when it’s more of a temporary fix and not a cure for the root issues, but here we are. I won’t go against the wind of today, just plan for where it’s going tomorrow.

While I am fully aware of the issues facing us today, I have not altered a favorable economic outlook for 2021 and 2022. It is a unique environment in so many ways as players make strategic moves due to the pandemic that will influence their futures. 

Technology will remain over-weighted in my portfolios. There is no sector with better long-term fundamentals, growing multiples of GNP for years to come, with great operating margins and cash flow, and finally, sell at reasonable valuations with discount rates so low for so long. The new normal is a fact of life, and so is digitalization, software, smart devices, the cloud, 5G, more time spent at home, etc. How can you not be invested in this area?

The bottom line is that you need to focus on where we are going over the next two years rather than over the next two months. It’s likely we’ll see a meaningful improvement in economic activity and corporate profitability in 2021 and 2022 for all the reasons stated above. Accordingly, stocks are the current place to be but remember that can change just like the weather.