If pressed to summarize the majority of last year and my expectations for the coming year in one word, I would choose “recovery.” For all the pain and struggle we’ve been through on a personal, political and economic level, there has continued to be a great sense of resiliency in America. It might not feel like it, but we actually spent more time on the road to recovery than we did in free fall in 2020. Now, as we enter 2021, we are starting to see the beginnings of a return to a normal state of health, mind and strength from the crises that have taken so much from so many.
Let’s take a look at some of the areas where we anticipate a 2021 recovery.
If the latest political headlines are keeping you up at night, just know that you’re not alone. It’s a tense time for all. That said, regardless of your political leanings, it’s important to remember that almost no political outcome is likely to knock the long-term course of business in America off its tracks.
That said, politics can certainly tilt the scales of prosperity for certain industries, and we think if there is any overriding impact of this election, it is higher U.S. inflation. A more left-leaning Congress is likely to up the ante on stimulus, hence upping the chances of inflation in 2021 and beyond. What’s proven to be an effective weapon against inflation? Owning stocks. U.S. equities have a 100-plus-year track record of outpacing inflation by more than nearly any other asset class (bonds, gold, real estate) by a wide margin. We think the following themes for the new year all point to an environment of inflation, which isn’t necessarily a bad thing for investors.
The COVID-19 vaccines will have a tremendous impact on the economy and stock market. Despite a slow initial rollout, MIT data scientist Youyang Gu estimates that by the middle of February, the U.S. will be vaccinating more than 1 million people per day, reaching herd immunity by early summer. Let’s think about what will happen to our economy as the need to stay sheltered in place goes away. As we get out of the house and get back to living our lives, it seems clear that the companies and stocks that benefited most from a COVID world will fade in 2021, along with the pandemic. Don’t get me wrong, we will still see huge wins in tech, but overall, I think we will see more traditional companies getting back in the game.
This year, valuation and price matter. Right now, the overall S&P 500 is trading with a Price to Earnings (P/E) multiple of around 23x. Historically, this puts the market into “overvalued” or rich territory and quite frankly, should make any investor question what’s happening. However, much of that lofty valuation is driven by that handful of technology companies that have been our lifelines during the past year. In fact, the six largest companies in the S&P 500 are technology companies, and they are trading at an average P/E north of 60x. Lofty by any standard. However, without these six companies, the 494 other companies that make up the S&P are trading at a more reasonable 15x P/E multiple. This is where a number of dividend-paying stocks reside. In fact, there are many dividend-paying companies that still boast attractive valuations and solid dividends that make us optimistic for 2021.
In the early days of the coronavirus pandemic, consumer confidence in the U.S. dropped drastically and we saw U.S. personal savings skyrocket to more than 30%. For context, this rate has lived at less than 6% for most of the past two decades. As we enter 2021, there are a variety of factors we believe will turn this tide and reinvigorate the U.S. consumer. As I mentioned earlier, the COVID-19 vaccines combined with the near $1 trillion in new economic stimulus beginning to hit the U.S. along with more that’s likely to come is likely to reignite the U.S. consumer and economy as a whole.
As the economy improves, we should also see an uptick in employment. More than 10 million Americans have already returned to work, and more jobs will be created as hard-hit sectors rebound. That would naturally lead to positive financial returns for more companies in a broad range of market sectors.
And we can’t underestimate the value to our psyches and sanity, as we recover our ability to see one another in person, hug, travel and get back to celebrations like graduations, weddings and reunions.
As investors, it’s impossible to separate markets from the soul of America. After all, investing doesn’t exist without faith in the very system that provides us with strength and opportunity. As we transition into a new political era and we continue our battle with COVID, it’s important to hold on to the belief that America will recover. For those investors who stayed in equities, the recovery has already been significant and may still have fuel left in the tank. There’s no need to chase the shiniest object in the market. I’m a strong believer in companies that are fundamentally sound, and have earnings growth potential and the ability to pay shareholders increasing cash dividends.
Stay the course and remember that investing is personal. You are working toward achieving your goals and purpose in the world. You want to enjoy the happy retirement you’ve been dreaming about and planning for over decades. Whether that’s a steady monthly income, a house on the beach, or a legacy you leave behind for your family, church or alma mater, let those goals be the beacon that keeps you on a steady course of investing in the year ahead.
Read the original AJC article here.
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