January 2021 Market Update
Happy New Year, and welcome to 2021!
I hope that this year brings to all of us less upheaval than the last. We were busy at the end of 2020, trying to reduce capital gains tax exposure for our clients. There were a lot of gains last year, and surprisingly few losses, so you may see some taxable gains on your 1099s in February.
By the end of 2020, stocks, as measured by the S&P 500, had staged a remarkable recovery from their March lows.
According to Kiplinger, the S&P 500 Index gained 16.3% in value in 2020. But there was a lot of disparity in returns. For instance, according to the JP Morgan Guide to the Markets, large-company growth stocks (companies that grow quickly, like Amazon, Google, Facebook, Visa, etc.) were up 38.5% on average in 2020, while large value stocks (epitomized by dividend-payers like Verizon, Johnson and Johnson, Pfizer, Duke Power, etc.) were only up 2.8% last year. That’s an amazing spread, as big as any I can remember. Also according to the JP Morgan Guide to the Markets, large growth stocks rebounded nearly 85% from the March low, and large value stocks gained about 64% from the low. It was definitely a year to buy the dip!
The big question is, where does that leave us heading into 2021?
To me, the stock markets look a bit pricey in the near-term, but they appear to have room for growth throughout the year. My outlook is quite positive, based on a rebound in corporate earnings, resumed growth in our economy, very low-interest rates, an accommodative Federal Reserve swamping the financial system with liquidity, and favorable investor demand. For sure, there are issues that could bog us down, like continued election uncertainly, high unemployment, and a fragile economy that could get broken by lack of progress on the COVID front.
I think the positives will outweigh the negatives, so I’m advising that stocks should be considered in a portfolio, where appropriate.
In my opinion, the S&P 500 could potentially gain another 5-10% this year, and that some areas (similar to 2020) could do considerably better. I advocate a barbell approach, with portfolios owning some stocks that performed well in a work-from-home environment, and others that will benefit from a “return to normal.” Small-company stocks are levered to the economic recovery, and could be a good investment assuming that happens. Emerging markets (like SE Asia, Eastern Europe, etc.) may also be able to take advantage of COVID recoveries and by the US Dollar, which has been weak recently. That weak US Dollar could help commodities, too, as well as industrial and manufacturing companies.
Of course, no one that I know of predicted the virus-induced stock market plunge, and I expect that there is something out on the horizon that could cause a shock in 2021—something we don’t know about yet, an “unknown unknown”. If that happens, we’ll re-evaluate and move forward. Either way, please don’t hesitate to review your Signature Life Plan. That was a great comfort to many of our clients this year. If you don’t have one, call me or email me back and we can start to work on one.
In the meantime, now is a great time to re-evaluate your risk tolerance.
Since many stocks and bonds enjoyed healthy returns in 2020, I suggest reviewing your portfolio to make sure that a stock, mutual fund, or asset class has not gotten too overweighted. I’m glad to help you with that if you’d like.