• Steve Coker, CFP

The Year Ahead – 2021 Outlook


When we wrote our 2020 outlook almost exactly one year ago, we outlined a basic expectation for 2020 and then highlighted the key risks to that view. Not surprisingly, “worldwide pandemic” did not appear on the list of top 2020 risks. And yet, 2020 surprised us with just such an event, a virus that drastically changed the global economy and market. Even more surprisingly, both the stock market rallied back despite the ongoing pandemic. As we look toward 2021, it is worth remembering that there are always surprises, unexpected events that will inevitably come, both good and bad, but surprises nonetheless. We begin our 2021 outlook with this caution because forecasting is always dangerous. With that said, this is what we see in 2021.


As we enter 2021 the U.S. Stock Market is at all time highs and looks rather expensive by most historical measures. Still analysts expect continued recovery and the stock market to go higher in 2021 based on three key trends: 1) Extremely low interest rates engineered by the Federal Reserve, 2) More stimulus from congress now and in the future 3) A receding virus beaten back by the vaccine. Said another way: there is so much ‘juice’ in the economy that it could really take off if we could get the virus under control. Let’s discuss each of these three key trends in turn.


Low Interest Rates


The Federal Reserve continues to flood the market with easy money, keeping interest rates extremely low. These low interest rates drive up asset prices by encouraging borrowing. Housing prices, for example, are rising in part because borrowers can afford more house with the same payment. This same concept can drive up prices in everything from stocks to commodities and vehicles. The Federal Reserve plans to keep interest rates low for a long time. If they are successful, and interest rates stay low, then stocks could continue to rise.

The biggest risk is that interest rates rise, either because inflation begins to take off, or because investors tire of the Federal Reserves intervention and stop buying bonds. Both scenarios are unlikely as the Federal Reserve appears to thus far be well in control of interest rates, but it is worth watching carefully.


Stimulus from Congress


As of this writing, Congress is preparing yet another Covid stimulus bill, and the biggest debate appears to be whether Americans are to receive $1,400 checks or $2,000 checks. It is likely that a bill will be passed within days pouring close to $2 Trillion in stimulus into the U.S. economy. Once again the stimulus speaks to higher stock prices as those dollars are spent and end up in corporate profits. There is even potential for even more spending later in the year as Congress, enabled by the Federal Reserve, pulls out all the stops on spending.

Of course, there is a risk that the stock market sets its expectations too high, setting investors up for a stock pullback. This is unlikely, but the market is already expecting a significant stimulus package. If Congress doesn’t deliver then stocks will respond accordingly. There is also a risk that Congress will deliver both a strong stimulus package and a big tax increase, which could roil markets. On balance the stimulus appears to be winning the day, but the law changes will be critical in 2021.


Receding Virus


The Corona Virus appears to be spreading as never before but the stock market is still hitting new highs. We noted in April of 2020 that the stock market is no longer driven by the virus since stocks were looking to the future, the other side of the valley, anticipating the virus receding and the economy returning to normal. Stocks still seem immune to the virus trends, likely due to the availability of the vaccine and the promise of returning to normal soon.

Of course, the virus is still a risk, most notably because government shutdowns could devastate the global economy once again. Thus far the trends are good but it will also be important to watch the virus numbers for risk of a setback.


2021


There is plenty of noise, but these three trends are set to dominate the economic outcome, and the direction for stocks, for 2021. With favorable outcomes stocks could continue to rise.