4TH QUARTER NEWS
We like the idea that one big takeaway from 2020 was the concept of resilience. The economy, the stock market, and Americans have persevered to various degrees from the unexpected shock of the pandemic. People are resilient and try to do the right thing to the extent possible. So we focus on the things that did go right in 2020: the federal stimulus packages, the massive amounts of liquidity from the Federal Reserve, and the rapid development of multiple COVID-19 vaccines. As result, after declining 40% in the spring, the stock market surged back over 70% from its market lows and ended the year in record territory. As one analyst said: “It goes to show that the stock market is pretty tough to take down.” We will stay with the theme of resilience for 2021. We are optimistic about the path of economic rebound as the vaccination program moves forward and the virus recedes. But we are realistic about the recovery of economic health and public health. We will see new obstacles and setbacks before we get to “normal times.” In this environment, we are positive but more restrained that many of our Wall Street colleagues about the outlook for the market. We think growth will be more subdued in 2021 than it was in 2020. We will be taking the long view, as always, when suggesting stocks for client portfolios. Much of the market’s gain in 2020 was concentrated in a small group of growth stocks that prospered in the pandemic. With the prospect of normal times, we will be looking at lower value stocks that can prosper as the economy fully reopens. We note that rotation into those stocks and sectors is already occurring and we will manage along with that trend in the year ahead.
The Economy: Consumer habits and whole industries may forever be altered by the pandemic. But, overall, economic activity has been staging a remarkable comeback. After experiencing its worst recession since the Great Depression, the U.S. generated a record 33.1% annualized GDP growth in the third quarter of 2020. Can the American economy continue its strong rebound in 2021? The current COVID-19 flare-ups across the country suggest that the virus has yet to be contained and will likely continue to impact near-term growth. Most growth forecasts depend on the trajectory of the vaccines. A slower rollout of vaccines could result in uneven growth for a few quarters, whereas quicker distribution could drive GDP growth above 3% in 2021. We believe that both the fiscal stimulus packages and accommodative Federal Reserve policy will assist sustained recovery. A look beneath the surface reveals that major sectors of the economy have moved in sharply different directions, reflecting the disparity between companies that have benefited from the pandemic and those that have been crushed by it. For restaurants, hotels, retailers, airlines and small businesses, it has literally been the worst of times. At the opposite end of the spectrum, the stay-at-home era has been a boon for e-commerce, cloud computing, video streaming, digital payment processors and home improvement stores.
The Market: Most Wall Street analysts are quite positive. CNBC did a recent survey in which the average forecast was for the S&P 500 to end 2021 about 9.5% above its current levels. Some analysts are predicting a gain of 15% almost comparable to 2020. This bullish view is bolstered by the expectation that average corporate earnings in the S&P 500 will exceed 20%. At Hudson Advisors, our prognosis is more restrained. First, the current S&P 500 10-year price/earnings ratio is 34.3 – compared to the modern-era market average of 19.6. Stocks are rich at the moment and the highly favorable views of corporate earnings will need to be realized in order to lower the P/E ratio. Second, we have concern that setbacks in vaccine implementation and longer than expected lockdowns may cause the market to stumble in the months ahead. Third, investors may get nervous over Democratic ideas to increase the capital gains tax rate. Given these caveats, we think it more sensible to assume S&P growth of 5% to 8% in 2021.