IT’S A NEW YEAR AND A NEW Administration in Washington, and our economic and investment outlook is generally optimistic—though it won’t necessarily be smooth ride. The challenges that we’ve been talking about over the past year are not yet in the rear-view mirror.
The Three Critical “C”s in 2021
We expect three intertwined themes to dominate the headlines, which we refer to as the three “C”s:
- The first, of course, is COVID. A widespread distribution of vaccines will be central to the full restoration of our economy. This will have special impact on the service sectors, which have been hit particularly hard. Five vaccines have been proven effective in Phase III trials, and we expect more to be approved. Experts project that 5 million full doses of vaccine will be administered globally before year-end. This is good news, but the emerging nations lag far behind in offering protection, and even in the U.S., only 7% of the population have received at least one shot so far.
- The second theme is confidence among both consumers (manifested in their spending) and companies (manifested in business investment and hiring). Confidence is up, but not quite to the pre-pandemic level, which we need to see; some 10 million Americans are still unemployed. Still, a reliable index of consumer confidence came back 60% from April to June last year, though it trailed off again in December.
- Finally, we need additional stimulus from Congress. There are some encouraging signs of bipartisan cooperation between President Biden and Congressional Republicans. But one way or another, a strong stimulus package is a must for rescuing many families, and we’re hopeful about a package emerging. The President says he wants to raise taxes to support all this spending—but not stifle the recovery. We’re watching all these developments carefully.
Because we’re encouraged about these issues overall, we’re anticipating strong economic growth this year, at nearly a 5% level after inflation. If this activity comes to pass, growth will no doubt be more moderate in 2022 and 2023—we think around 2½%.
A Seismic Shift in How We’re Living
Meanwhile, the pandemic has vastly accelerated big changes in our daily lives and in business—changes happening right now that at one time we anticipated would take five to 10 years to play out. We all know that we’re using technology far more than before in our family, social, and purchasing patterns. Much of this is likely to continue after COVID is history. In response, businesses have hardly stood still in the way they’re interacting with their clients, suppliers, and employees. For example, while traffic is down among department and apparel stores, it’s more than compensated by increased business in home-improvement outlets. Of course, not every store can change its identity, but retailers in general are adapting to the changes. So are providers throughout the economic sectors, even including health care.
Some things, though, haven’t changed. While many predicted the death of business in major cities, as they moved to suburbs, that has not come to pass. Perhaps we’re even seeing the opposite. Amazon, for example, has bought the iconic Lord & Taylor building on New York’s Fifth Avenue for a large cohort of its employees. Facebook leased all the space in New York’s old Post Office—730,000 square feet—and plans to house 15,000 of their people in the building. In our view, the vitality of cities like New York and Boston is key to the economy of the Northeast and the country—and cities aren’t disappearing.
We listed the three “C”s above that we believe will head up the news this year. The watershed transformation in our lives might be summed up by “A, B, and C”: accelerated new developments, business models that have adapted efficiently, and cities that remain energetic business hubs.
As for the Markets and Our Response…
We’re happy to see signs that gains in the U.S. stock market are becoming broader-based. Last year, if all you owned was the five “FAANG” stocks—Facebook, Amazon, Apple, Netflix, and Google (which trades as its parent company Alphabet)—you’d have won big. In fact, the remaining 495 stocks in the S&P 500 moved little in 2020. We wished to see a broader market, where mid- and small-cap stocks also do well, along with bargain-priced Value stocks, which are often more tied to the economy. There’s some evidence that the cycle may be changing in those directions; we’re monitoring developments carefully.
In our client portfolios, we’ve responded accordingly. We’ve reduced our allocation to large Growth stocks and are moving more toward small-cap and Value. And we’ve trimmed our U.S. stocks in favor of international—especially in emerging nations—since the markets abroad are considerably cheaper than here. As for fixed income, we’re maintaining an overweight in corporate bonds with an average maturity moderately shorter than the market. We took no part in the bubble of buying heavily-shorted stocks, though some of that turmoil may continue short-term. Our positioning added return relative to the market last year, and we expect the same in 2021.
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Overall, our outlook is positive. We’re hopeful that a virtuous cycle may emerge, with widespread vaccination fueling increased spending by both consumers and businesses. Spending and business activity promote more of the same; the result should be a reinvigorated economy.
Perhaps most important, a new year and a new political environment suggest that clients review their investment plans, their financial documents, and their portfolio allocations. Asset allocation has always been the most important driver of long-term results, and allocation advice is one of the most important services we offer. This is a great time for you to consult with your Advisor; we’re at the ready.