By Michael Carlisle on January 21, 2021
By Michael Carlisle, Vice President &
Investment Committee Chair
The word “unprecedented” is often overused, but in reference to 2020 it almost seems an understatement. Unprecedented, indeed.
In response to the worst pandemic in our collective memory and a country in conflict with itself over lockdowns, individual freedoms and election results, the Fed and Congress initiated unprecedented amounts of stimulus. Those steps lowered Fed funds to zero, thereby inducing a vigorous rebound in market values from a gut-wrenching decline in excess of 30% in March.
While 2020 is defined for many as the year of COVID-19 and for others as a raucous election year, for investors it was the year of mega-stimulus. The developed world’s monetary and fiscal stimulus dwarfed anything previously seen before, and one is tempted to use the U-word again.
The magnitude and rapidity of monetary stimulus certainly will influence the investment outlook for 2021 and beyond. The first trading days of the new year have already attested to the power of expected additional stimulus.
An overriding question from many clients in 2020 was, “In the face of a pandemic and catastrophic loss of business and jobs, how can the stock market keep going up?” Answer: pandemic shocks are like natural disasters; their cycles are generally much briefer than traditional recessions and the financial markets are not the same thing as the economy. Although similar, they live on different life cycles.
In 2020 we learned (or were reminded) that low interest rates are not only good for bond prices but stocks as well. So, with the Fed fully committed to easy monetary policy, a new Congress already signaling more fiscal stimulus, and with COVID vaccine uptake forthcoming, 2021 augurs for improved employment, accelerating economic activity and further gains in asset prices.
However, the equity melt-up that took place at the end of 2020 will likely limit market gains in 2021. While we expect positive performance in 2021, it’s unlikely to be anything close to the levels seen in 2020. See the table below.
We begin the year with bullish consensus, but that usually sets the table for corrections (-10%) and profit-taking from time to time. We would expect 2021 to be no different.
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