It's always darkest before the dawn It's always darkest before the dawn http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\sunrise-mountains-small.jpg January 4 2021 December 30 2020

It's always darkest before the dawn

Three things to watch in 2021.

Published December 30 2020
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December 21 was the winter solstice, the shortest day and the longest night in a most difficult year. It's symbolic of better things to come, as the darkness of 2020 gives way to the dawn of a new day in 2021. While 2020 can’t end soon enough, the S&P 500 did stage a powerful 70% rally from its trough on March 23 to its most recent record high, setting the table for further gains in 2021.

  • Operation Warp Speed Vaccine development historically takes five years or longer from scratch, but the pharmaceutical and biotechnology industries, in collaboration with the federal government, produced two (and counting) coronavirus vaccines in a record nine months’ time. We’ve already started to distribute vaccines created by Pfizer/BioNTech and Moderna here and abroad, and AstraZeneca/University of Oxford’s drug may be approved for emergency use by the FDA in coming weeks. By our conservative count, about 25 million Americans might be vaccinated per month, which might lead to critical mass and herd immunity by the middle of 2021. Independence Day may take on special meaning in 2021 as we become free from the deadly coronavirus. Business and consumer behavior as well as economic activity should begin to normalize as people return to their offices, shop in person, travel, enjoy entertainment and the like, satisfying enormous pent-up demand to quell some serious cabin fever. One caveat to watch is whether or not the virus’ mutation identified in the U.K. recently will alter the trajectory of the recovery?
  • Divided government works A record 160 million Americans participated in last month’s highly contentious presidential election, and many were clearly fed up with the noise, nonsense and tweet volume emanating from the White House over the past four years. But they generally seemed to like President Trump’s fiscal policies, and enough voters split their ballots to result in a check-and-balance to keep President-elect Biden’s new policies in the middle of the legislative fairway. The Democrats’ 35-seat House majority was expected to expand to 45-55 seats, but instead it shrunk to nine, the party’s thinnest majority since 1880, according to Strategas. Democrats also were expected to reverse the Republicans’ six-seat majority in the Senate, but the GOP is now holding onto a two-seat lead. The final count will be known after the two runoff elections in Georgia on Jan. 5. According to Trafalgar, Senator Kelly Loeffler leads Raphael Warnock by 6%, and Senator David Perdue leads Jon Ossoff by 2%. If the Democrats win both seats, then a 50-50 Senate split means Vice President-elect Kamala Harris will break all ties, and committee chairmanships will be held by Democrats. The S&P 500 has rallied 15% since the end of October because investors believe that the Blue Wave is off the table. We’re watching those two races closely, as they may dictate the direction of fiscal policy under Biden, the pace of economic and corporate earnings growth, and stock-market performance.
  • Stick with the catch-up trades We have a constructive view on stocks next year, due to the aforementioned vaccine rollout, a zero-bound Federal Reserve driving the “TINA” trade, easy year-over-year comparisons and a Congressional honeymoon period for the incoming Biden administration resulting in more fiscal stimulus and infrastructure spending. As a result, we are sticking with our 5% overweight in stocks and 6% underweight in bonds heading into 2021. Our year-end S&P target of 4,500 is 20-25% above current prices on a total-return basis. But selectivity matters. From the market’s bottom on March 23 through Aug. 31, the Russell 1000 Growth index (RLG) surged 74.2%, led chiefly by domestic large-cap technology stocks, like the FAANGs and Microsoft. The Russell 1000 Value index (RLV), in contrast, rose only 44.8% on a total-return basis over this same period, trailing RLG by 29.4%. But from Aug. 31 into Christmas Eve, RLG rose 5.3%, while RLV surged 12%, as value outperformed growth by 6.7%. We expect this catch-up trade to continue into 2021. From March 23 through Aug. 31, the MSCI EAFE index of international developed stocks (MXEA) rose by 43.4%, trailing the S&P (which rose 57.7%) by 14.4%. But from Aug. 31 into Christmas Eve, MXEA rose 10.2%, while the S&P increased 5.9%, as international outperformed domestic by 4.3%. We also expect this catch-up trade to continue to work during 2021. Lastly, the Russell 2000 small-cap index (RTY) rose 56.8% from March 23 to Aug. 31, underperforming the S&P by 1%. But from Aug. 31 to Christmas Eve, the RTY surged 29%, outperforming the the S&P by 23%. We expect this recent outperformance to continue.

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Tags 2021 Outlook . Markets/Economy . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

The value of equity securities will fluctuate and, as a result, the fund's share price may decline suddenly or over a sustained period of time.

MSCI Europe, Australasia and Far East Index (EAFE) is a market capitalization-weighted equity index comprising 21 of the 48 countries in the MSCI universe and representing the developed world outside of North America. Each MSCI country index is created separately, then aggregated, without change, into regional MSCI indices. EAFE performance data is calculated in U.S. dollars and in local currency.

FAANGs is the acronym for Facebook, Amazon, Apple, Netflix and Google aka Alphabet stocks.

Growth stocks are typically more volatile than value stocks.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Past performance is no guarantee of future results.

Russell 1000® Growth Index: Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made directly in an index.

Russell 1000® Value Index: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

Russell 2000® Small Stock Index: An unmanaged index consisting of approximately 2000 small capitalization common stocks and is a trademark/service mark of the Frank Russell Company. Russel™ is a trademark of the Frank Russell Company. Investments cannot be made directly in an index.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

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