2021 Market Outlook
Post from 12/12/2020
2020 turned out to be a good year for most investors. Although troubled with Covid-19 and lockdowns across the country, the S&P still managed to increase 14.21% ytd as of 12/23/2020. The crash in march only lasted about 5 months, and by August the S&P regained all of its losses and never looked back. Indexes and stocks are hitting all-time highs as we approach the end of the year. If anyone hasn’t told you, this is very abnormal and highly unlikely to continue next year. But I guess there are a few reasons for it. I can give you my thoughts.
After the crisis began in March, many businesses were forced to shut down leaving millions unemployed. As the government and federal reserve were forced to make quick decisions, they implemented a few things. Good or bad decisions? Who knows. First the federal reserve reduced the interest rate to near 0%, allowing businesses to borrow money at very low rates in order to make it through the pandemic. This also has made it one of the best times in history to borrow money. At the same time, the government passed a $2 trillion dollar stimulus package which consisted of many things such as $1200 checks, SBA & PPP Loans and supplemental unemployment benefits. If you’re wondering where all this money came from, it was printed by the federal reserve. $2 trillion created and made available that fast to individuals and businesses in the U.S. When you increase supply, in this case the amount of currency available, it decreases the demand for it. In other words, the U.S Dollar as a currency, is decreasing in value. It’s becoming worth less and less. Things will cost more. Therefore investors that understand this, are scurrying to move their cash into any asset that can be a store hold of wealth and hopefully keep up with inflation. Many of these assets benefit from a weaker dollar and low interest rates for example in most cities it will cost more to buy property. Public companies and their stock benefit as well. Low interest rates are viewed as a catalyst for growth. Future earnings potential is increased because companies can utilize low financing to make acquisitions, run their day to day operations, and find new ways to grow their business. Ultimately, this increases asset prices based on their future value.
The big question is, will the government and federal reserves solution work? Are the current market conditions (pandemic, monetary policy, and fiscal policy) benefiting more people and businesses or negatively affecting more? Who knows. I know people facing problems such as unemployment risk and small business closures. But at the same time, I know people who have greatly benefited from the pandemic. Things could really go either way. Fiscal policy may change under Joe Biden starting January 20th. Taxes may change. Federal reserve may begin to raise interest rates sooner than later, although they claim rates will remain low until 2023. There may be lockdowns in 2021 or there may not. Businesses may fail leaving many unemployed. Real estate markets can change quickly based many factors such as supply, demand, interest rates and forbearance. The difference in outcomes right now is very unknown. We could have a really good year and the economy can keep moving forward or we could have a really bad year. I think things will fall somewhere in between and we will see both successes and failures. No one really knows how this coming year will be.
So how should you invest in the stock market in 2021? Absolutely, understand that we are in the longest economic expansion ever, going on 12 years. I want to say we are near the end but I’ve been saying this for a few years now and obviously I’ve been wrong. The most important thing you can do is stay invested so you don't miss out on opportunities growing your wealth. Buy securities that have a history of providing solid returns. Don’t let high prices scare you, but make sure you are buying value and not speculating. And have a small percentage of cash available for a downturn. You want to look for good companies with a consistent increase in cash flows, little to no debt, and in high growing industries. What industries are high growing and going to be here in 3-5 years regardless of Covid-19? Ecommerce, digital payments, streaming, social media platforms, artificial intelligence, web security, cloud computing and data to name a few. Digitalization of everything, for example healthcare services, education, exercise from home, real estate services and much more. Make sure you have a diversified portfolio consisting of stocks in different industries, a combination of value and growth, be patient, and be prepared for anything. If you own good companies that are making good products and making money everyday, a sudden decrease in stock prices shouldn’t alarm you. In fact, you should look at it as an opportunity to buy more shares of great companies you truly believe in.
I don't think the overall market returns will be as good as they were in 2020, but if you own the right individual stocks I think you will still benefit based on where the future is headed, low interest rates and a weaker US dollar. In 2021, I think investors will have to be more strategic and really analyze and understand the fundamentals of individual companies to outperform. If you would like our recommendations on specific stocks to buy, then our portfolio recommendation service is perfect for you! You will receive our growth portfolio of 40 + stocks, new buy recommendations sent to you as we discover them, and a monthly market summary. We already did the research for you. All you need to do is buy the stocks and be patient.
Robert Clark,
CEO, Ball Street Capital