Protection Point Advisors: 2021 Economic Outlook

A Brief look back

2020 went from a very good beginning to one of the fastest declines in history.  Event-driven declines average 8 months to bottom, but in 2020 markets fell about 33% in 5 weeks.  We were proud of our ability to move to relative safety in most of our investment models very quickly.  The recovery was just as dramatic.  Event-driven market recoveries average 13 months and 2020 actually only took 5 months during a very divided and uncertain election, riots, and rising infection rates.

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A look forward

Stocks

We expect 2021 to be a good to very good year.  Global GDP is estimated to see a 6% increase and the US should come in about 4%.   Estimates of the S&P by end of the year 2021 vary considerably, but we see ranges from 3,900 to 4,400 (9% – 20%+) with considerable supporting data.  Valuations are starting to get stretched historically, but less so when also considering historically low-interest rates as an alternative.  Tech seems to have moved from high growth to the “new” safe stocks and potential higher returns should come from small/mid stock or areas of the economy that have not yet fully participated in the rebound.  This includes dividend stocks, utilities, and value stocks.  International stocks should also see significant gains, particularly Japan, China and emerging markets.  Market volatility is expected to remain high and, it would be reasonable to expect a significant drawdown along the way.

Bonds, inflation, and interest rates

Interest rates are expected to stay low, with the curve steepening towards year-end.  Current 10-year Treasuries are at 1.1% with the end of 2021 targets being 1.4% – 1.5%.  These low-interest rates mean that inflation should also stay low, running at 1.4%, so no hyperinflation.  This means that safe, low-interest-rate bonds will start to feel a headwind and they have given up the last benefits of falling rates.  Going forward, investors will need to look at higher-yielding bonds, structured income, and global real estate for real income.

Real estate

A lot has been made about the possible crash of commercial real estate.  While it’s true that employers have fully discovered the benefits of a distributed at home workforce, there are also significant downsides to a home workforce.  So far, default rates on commercial leases are low and most leases don’t renew for years.  Commercial property values have fallen and this area remains a mixed bag.  For those buying distressed real estate now, returns could prove to be very good.  While office, leisure, and retail may have its challenges, commercial also includes data centers, industrial and storage which could see strong growth.  Overall, global real estate is expected to grow by 5.1%, plus rents (dividends).  Single family and apartments should continue to see strength with low interest rates and historically low supply.

Alternatives

Alternatives is a catch all for so many unrelated investment approaches.  Commodities like gold and oil are expected to do well and economies reheat with demand and stimulus.  Momentum investing, hedge funds, and managed futures tend to do well in volatile and uneven markets where they can seek out particular opportunities rather than the broad market.  We have already discussed real estate.

Vaccine

Herd immunity (where 70% of the population has been vaccinated or exposed) is expected by mid-summer.  Expect restaurants to be increasingly busy as competition has fallen and demand dramatically increases.  An interesting statistic is that COVID-19 fatality rate is expected to drop by 75% when just 17% of the population over 65 is vaccinated.  While new strains continue to develop, the current vaccines seem to have similar protection to these new strains.

Politics and taxes

With a divided Senate, many Biden envisioned policies will have to wait.  We do expect to see some increase in corporate taxes to 25%, possible change to capital gains and ordinary income treatment, payroll tax increases and estate tax exemption might be lowered.  In general, there doesn’t seem to be an appetite to stall any recovery in 2021 with significant tax increases, green new deal or dramatic re-regulations.  By 2022 or 2023, this could change.  It’s also important to remember that market returns historically have not shown an advantage to a Democrat or Republican in the Whitehouse.  We do see an easing in trade restrictions.  More trade along with additional stimulus should propel the economy forward.

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