I hope the first days of the new year have treated everyone well. As the world waits for the holiday/winter surge of COVID-19 to abate and the days until leadership change in Washington shrink, prognostication season continues in the world of investment management. While nearly every manager worth their salt puts forth their thoughts, there are a few articles I look forward to each year--Bob Doll of Nuveen and Blackstone's 10 Surprises.
Here's what I'm reading to start the year:
- A new slim majority -- The Democrats gained a slim majority in the Senate, paving the way for greater public spending.
- Virus dynamics and macro outlook -- A more infectious virus strain could delay the activity restart but BlackRock sees the cumulative economic loss as a fraction of that seen after the 2008 crisis.
- Vaccine rollout still in focus -- The pace of vaccine rollout amid a virus resurgence will stay in focus in a week of few data releases. Markets have so far shrugged off rioting on Capitol Hill.
BlackRock will be joining us for our first webinar of the year today: WEBINAR SCHEDULE
- U.S. real GDP increases at its fastest pace in twenty years.
- Inflation approaches 2% as the 10-year U.S. Treasury yield reaches 1.5%.
- The U.S. dollar sinks to a five-year low.
- Stocks reach a new high for the twelfth consecutive year, but fail to keep pace with strong earnings growth.
- Stocks outperform cash, but cash outperforms Treasury bonds for the first time since 2013.
- Value, small and non-U.S. stocks (especially EM) outperform growth, big and U.S. stocks.
- Health care and financials outperform energy and utilities.
- U.S. federal debt rises to more than 100% of GDP on its way to an all-time high.
- The U.S./China cold war continues, but the conversation becomes quieter and more multilateral.
- Despite polarization, President Biden, Senator McConnelBlacl and moderate forces achieve some compromise legislation.
Mr. Doll also revisits his 2020 calls and scores himself. His #10 in 2021 already needs an update given election results.
Blackstone defines a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening. Mr. Wien has a tradition of publishing these each year dating back to 1986. Always an "interesting" read.
- Former President Trump starts his own television network and also plans his 2024 campaign. His lead program is The Chief, in which he weekly interviews heads of state and CEOs with management styles like his own. His virtual interview with Vladimir Putin draws more viewers than any television program in history.
- Despite the hostile rhetoric from both sides during the U.S. presidential campaign, President Biden begins to restore a constructive diplomatic and trade relationship with China. China A shares lead emerging markets higher.
- The success of between five and ten vaccines, together with an improvement in therapeutics, allows the U.S. to return to some form of “normal” by Memorial Day 2021. People are generally required to show proof of vaccination before boarding airplanes and attending theaters, movies, sporting events and other large gatherings. The Summer Olympics, postponed last year, are held in July with spectators allowed to physically attend.
- The Justice Department softens its case against Google and Facebook, persuaded by the argument that the consumer actually benefits from the services provided by these companies. Certain divestitures are proposed and surveillance restrictions are applied, but the broad effort to break them up loses support, except in Europe.
- The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers. Fiscal and monetary policy remain historically accommodative. Nominal economic growth for the full year exceeds 6% and the unemployment rate falls to 5%. We begin the longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.
- The Federal Reserve and the Treasury openly embrace Modern Monetary Theory as their accommodative policies continue. As long as growth exceeds the rate of inflation, deficits don’t seem to matter. Because inflation increases modestly, gold rallies and cryptocurrencies gain more respect during the year.
- Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to “normal” increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl. Rig counts increase and energy high yield bonds rally soundly. Energy stocks are among the best performers in 2021.
- The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices. “Risk on” is not without risk and the market corrects almost 20% in the first half, but the S&P 500 trades at 4,500 later in the year. Cyclicals lead defensives, small caps beat large caps and the “K” shaped equity market recovery unwinds. Big cap tech is the source of liquidity, and the stocks are laggards for the year.
- The surge in economic growth causes the 10-year Treasury yield to rise to 2%. The yield curve steepens, but a concomitant increase in inflation keeps real rates near zero. The Fed wants the strength in housing and autos to continue. As a result, it extends the duration of bond purchases in order to prevent higher rates at the long end of the curve from choking off credit to consumers and businesses.
- The slide in the dollar turns around. The post-vaccine strength of the U.S. economy and financial markets attracts investors disenchanted with the rising debt and slower growth of Europe and Japan. Treasurys maintain a positive yield and the carry trade continues.