The bull gets the vaccine
It's a 'heads I win, tails I win' setup for 2021.
As investors pull safely into harbor after the tumultuous voyage of 2020—numb, exhausted, out of breath, but “Still Standin’”—it turns out we should have been even more bullish than we were for this year. Our 3,500 year-end forecast for the S&P 500, viewed as somewhat crazed back in March when the bull got the virus, was surpassed definitively in November once the divided we stand scenario became the post-election outcome. With the market poised to close out 2020 in the 3,700 vicinity, our previous 4,000 projection for 2021 strikes us as too mundane for the very bullish setup as we see it.
So yesterday, Federated Hermes’ PRISM® asset-allocation committee raised that forecast to 4,500 and pulled forward its 3-year 5,000 forecast to 2022 to account for the remarkably strong cyclical recovery we see in place for 2021, the flames of which are being fueled and encouraged by an overstocked Christmas tree of multiple yule-tide logs and favorable tailwinds. In addition, we added the third of the three points we committed to put into equities before year-end, taking our recommended equity overweight to 50% of maximum, with all of the overweight concentrated in domestic value, small-cap value and international stocks.
Here’s a list of the top 10 reasons we think investors are facing an unusually positive environment for stocks next year.
- Don’t fight the Fed, the European Central Bank, the Bank of Japan, the Bank of England and the Peoples Bank of China. The Fed saved the day for the markets and economy in March when it broke the glass, and with unemployment only halfway back to pre-crisis levels, it and the other central banks of the world show no signs of relenting just yet. With rates at the short end pinned near zero, money supply is historically easy, fueling economic investment and making stocks the only real game in town in the capital markets. And with short rates remaining so low as the economy continues to recover, the long end can’t help but rise a bit (we think to 1.2-1.5% on the 10-year Treasury by next year-end), further supporting lending activity.
- Return of housing. Most of today’s younger investment managers never invested in the '90s and early 2000s, when housing was one of the key engines of economic growth, both because it employed so many workers and because for Americans, home ownership is our major store of wealth. Now, 15 years after the real estate bubble burst, and with only minimal construction activity since then, housing is in short supply even as demand accelerates due to renewed suburban flight from the cities. Housing markets are booming, with a long way to run to even get back to the annual starts levels of 2005 and 2006 when the country’s population was 10% smaller and the largest generation ever, the millennials, had not yet reached the household creation stage. We expect housing to be an even stronger driver of economic activity next year than it was in 2020.
- Vaccine arrives. Incredibly, less than nine months since the Covid implosion in March, we sit here having seen the fastest development of a vaccine to cure a global pandemic in the history of mankind. As vaccinations roll out across the country, indeed the world, over the next three to six months, the spirits-dampening impact of the virus literally will disappear as quickly as it arrived. By the second quarter, this will be a key rocket booster to the already underway recovery. Whole industries that have virtually disappeared—travel and leisure, restaurant dining, corporate travel—are likely to come back, possibly even stronger than most expect. I know you and your family are thinking you may be the only ones planning on a well-deserved splurge once it’s safe to go out, but let me assure you, you’re not. Best to book that special trip today.
- Credit booms. With the Fed on hold and fully supportive, the credit markets are booming. Ready credit availability is a fundamental building block of economic activity and in 2021, credit looks to be as readily available as we’ve seen in a very long time.
- Manufacturing comes home. We’ve written about this several times, so I won’t belabor it. “Brand China” is dead. Global supply chains are not what they once were. Increasingly around the world, companies are reworking supply chains to bring manufacturing closer to the consumer markets where their products are targeted. This trend is going to spark investments around the world, but the one market that is likely to benefit the most from this would seem to be the world’s largest consumer market. I wonder which one that is?
- Digital revolution keeps accelerating. A key lesson of the 2020 crisis for nearly all industries was that the little pigs who built their house on a strong foundation of technology, allowing them to reach their customers virtually, were the ones whose homes survived the storm. We don’t look for this trend to reverse next year, but rather accelerate. Technology investment today is the new “Capex” that drives economic growth and productivity, and the global economy is going to be getting another giant shot of this in 2021.
- Biotechnology revolution continues to explode. With Biotech and Big Pharma now the solution, not the culprit, as demonstrated by their remarkable response to the Covid crisis, we look for investment in this industry—and all the economic efficiency gains this produces—to again be extremely strong in 2021. In fact, the pipeline of new investments our health-care teams at Federated Hermes see going into next year is as strong as we’ve ever experienced.
- Productivity, the key driver of economic growth, explodes to the upside. Traditional economists have long moaned about the loss of economic productivity gains in the last decade. Some of this was poor measurement of the economic impact of technology on the economy, and the many effective price reductions or quality enhancements those gains have produced. Part of it was self-induced productivity drags of higher regulation and taxes as the economy was exiting the Great Recession. Though the incoming administration for sure might revive some of these Obama-era productivity depressants, our guess is less so this time around, particularly in the face of the renaissance sparked by the pro-growth policies of the outgoing Trump administration. But even if these are dampened somewhat, the gains from the massive technology investments of 2019 and 2020 are likely to spark big gains in 2021 in economic productivity.
- Easy year-over-year (y/y) comparisons. If all of the above were not enough fuel for an historical cyclical rebound in 2021, let’s add one more: the economic and earnings numbers we will be facing in 2021, especially in the more cyclical, traditional “value industries” that were almost shut down this year. This will make for perhaps be the easiest y/y comparisons since 1934.
- Wall of Worry firmly intact. Finally, though many investors are finally talking bullishly again, most are still not heavily weighted in stocks. This recovery’s speed has been so fast and sharp that it has been very difficult for investors seeking to buy the dip to get back into stocks after the spring panic. Cash stockpiles, and money market assets, remain outsized. Liquidity abounds. And the spring scare still has everyone nervous, to say the least. Georgia is the latest worry, and we agree, it’s important for the long-term growth trajectory of the economy. On the other hand, in the near term, it seems that regardless of which party wins the Georgia runoffs, a big, or bigger, fiscal deal are the two alternative outcomes. And even if the Democrats win to control both chambers of Congress (assuring a bigger fiscal deal), their thin margins and the traditional midterm incumbent-party setback will haunt them from the start of the new Congress. So the worst of the longer-term growth-slowing policies they are banding about may never come to pass. To us, the Wall of Worry for January, particularly focused on the Georgia runoff, could really end up representing one of those classic “Heads I win, tails I win” bets for investors.
There are worries out there for sure, if not Georgia, then maybe inflation picking up, commercial lending upended due to the crisis in our cities, or some curveball from the world of geopolitics. We’ll cover those in the New Year with our annual “Top Five Surprises” piece. But when you add it all up, the list of positives to us seems far stronger, deeper and surer than the risks.
The bull may have gotten the virus earlier this year. But he’s shaken it off, gotten himself vaccinated and has emerged stronger, fiercer and faster than ever. Have a well-deserved and happy holiday with your families, and a Happy New Year. From our perch, it looks to be just that.