The lessons of 2020 are many and will no doubt be with investors for years to come. During the depths of the March sell-off, investors again learned that diversification—often unappreciated until it’s needed most—did its job and provided some much-needed refuge during a torrent of market volatility. In the spectacular recovery that followed, we were reminded what it means to be long-term investors and how we shouldn’t make investment decisions based on short-term emotions. And we saw yet again that investment trends don’t continue endlessly when late in the year we witnessed the beginnings of a rotation out of U.S., growth and large cap stocks and into non-US, value, and small cap stocks.
As we look towards 2021, we see glimmers of hope that the year ahead will see a return to some degree of normalcy. The U.S. presidential election is behind us and we have three viable vaccines for COVID-19. Economists are projecting robust economic growth in 2021. Equity analysts subsequently forecast a healthy recovery in corporate earnings and with it, a broader recovery in stock prices to include asset classes hit especially hard by the pandemic—asset classes such as value, small cap, and non-U.S. stocks.
Yet there is much that could derail such optimistic forecasts. To name a few, the federal government’s vaccine distribution strategy appears unclear and haphazard at best; politically, our country remains deeply divided; and new shutdowns to combat a steep increase in infections may ultimately delay or stunt the long-awaited economic recovery. And an additional COVID-relief package to combat the economic fallout from the virus remains limited. All of which is to say nothing of the U.S. federal government’s ballooning debt.
What a year it’s been. I’m sitting here staring at the Dow Jones at over 30,000. Who would’ve expected this back on March 23, when the Dow was sitting at close to 18,000?
As we look back over the past 11 months, it’s hard to believe where we’ve been and how far we’ve come. As we eagerly look to put a book end on 2020, let’s pause for a moment and take stock of several lessons we learned (and re-learned) this year.
Late in the year we witnessed the beginnings of a rotation out of U.S., growth, and large cap stocks and into non-U.S., value, and small cap stocks, confirming that investment trends don’t continue endlessly.
In our view, despite all that ails us at the moment, 2021 looks quite promising. Here’s what we think is in store for 2021, what we’re watching, and—to temper our optimism—a healthy acknowledgement of what we think could jeopardize next year’s positive outlook.
There are no guarantees that Washington’s political dysfunction will go away with the ending of the 2020 elections, nor are there any promises that COVID will disappear overnight with a new vaccine. The vaccine may ultimately be less effective than initially thought. Further, we could experience any number of problems associated with the Georgia Senatorial elections in early January. These are just a few of the things we’re on the lookout for that could fuel market uncertainty and disrupt our 2021 outlook.
Threats to next year’s optimistic earnings projections are many. The economy could fail to re-gain traction after months of crippling shutdowns—a threat that seems increasingly more real as more governors move to again shut down their economies. Subsequently, consumers could pull back on discretionary spending, which seems especially likely given new shutdowns and the new, limited round of COVID relief for families and the unemployed.
There are of course no guarantees that small cap and value stocks will continue to outperform as they have over the past quarter; returns, after all, can be quite random. We could, for example, see market leadership pivot back to mega-cap technology and growth stocks. For the moment, that appears less likely given the nosebleed valuations of many technology and growth companies relative to small caps and value stocks. Further, the prospect of a broad-based economic recovery in 2021 should facilitate a broader market rally versus a narrower lead by a handful of stocks.
While we’re optimistic for all that 2021 promises, none of this is to say we should expect 2021 to be smooth sailing. There will certainly be starts and stops along the rough road to recovery. At times, just like in 2020, the future may seem dark and ominous; at other times, it may appear bright and full of promise. The secret to successful investing is taking the market’s mood swings in stride—and not letting the mood of the moment lead you to make short-term decisions with long-term assets. As we learned yet again in 2020, the best way to deal with volatility is through broad diversification, careful and proactive planning, and a healthy, long-term perspective.
1JP Morgan, Guide to the Markets, As of December 11, 2020
2FactSet “Earnings Insight”, December 11, 2020
3JP Morgan, “Guide to the Markets”, December 14, 2020
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