The fact that the S&P 500 had a positive return in 2020 is amazing. The fact that it was up over 18% is a downright miracle in our opinion. The year 2020 was historical for so many reasons – the first pandemic in the U.S. since 1918 (102 years), the most active year ever for fires on the West Coast, a very active hurricane season with 30 named storms, and an election year unlike any we’ve seen before.
Across the world, 2020 had the worst decline in global Gross Domestic Product (GDP) since World War II. In fact, 19 of the 20 largest world economies saw their GDPs shrink. Of all global economies, 93% were in a recession during 2020.
For the U.S., GDP fell an estimated -3.6% for the full year. Technology, air freight, and pharmaceutical companies lead the growth in the U.S. markets, while oil and gas and travel and tourism had the worst losses.
Economists forecast that the U.S. will recover the GDP losses of 2020 by the second or third quarter of 2021. If that pans out, recovery from the recession that started in February 2020 will have taken sixteen to nineteen months. (An average economic recovery takes eighteen months.) By the end of the 2021, we should be in the expansion phase of the economic cycle.
What are we likely to see in 2021?
On the global scale, all of the twenty largest global economies are expected flip back to GDP growth. However, 12% of all global economies are expected to still be in recession during 2021.
For the U.S., the current 2021 forecast for GDP is +4.0%. Expect to see more stimulus in (at the time of this writing, President-elect Joe Biden has already proposed the first stimulus package of 2021). Economists expect to see an infrastructure program this year to help with unemployment. We will definitely continue to a historically large budget deficit in the U.S. at least through 2021.
COVID-19 vaccines will continue to be manufactured and pushed out to the public as quickly as possible. In North Carolina, frontline workers and long-term care facility residents are receiving their second doses. Folks age 75 or over are getting their first round. Other healthcare and frontline essential workers will be next, followed by anyone ages 65-74 regardless of medical condition. Throughout the U.S., about 1.9 million vaccines are being administered daily as of Jan. 21st.
The Raymond James Chief Investment Officer, Larry Adam, forecasts the U.S. Economy to have an interesting trajectory in 2020. For the first several months, we can expect to see continued restrictions on travel and businesses due to increased numbers of COVID-19. Sectors of the economy that were hit hard during 2020 will continue to be hampered. However, mid-year, we should start a steep increase in economic activity. As the weather warms and businesses can open with more capacity, things will pick up.
Larry’s forecast has the S&P 500 Index reaching 4,025 by the end of 2021 (It’s at 3,768 as of this writing). This would result in a 7.5-8.0% increase this year. Large cap stocks are expected to do well in the first half of the year. Small cap stocks (which are more impacted by restrictions on business) should see their recovery in the last half of 2021.
Volatility in the world markets is expected to be lower in 2021, with the possible exception of the first quarter. With COVID-19 vaccines in place, the number of cases should begin decreasing. No U.S. elections this year means less political tension.
A recent study suggested there is a huge pent-up demand for travel both in the U.S. and abroad. Expect travel in late 2021 and early 2022 to eclipse pre-COVID-19 levels. Parts of the travel and tourism lost 20% to 60% of normal revenues during 2020, so that surge will be welcomed.
How do the economic indicators look?
- Consumer spending is 70% of the U.S. economy. Currently, there are a lot of people sitting on cash. Expect to see spending on services like food and recreation pick up.
- Expectations are that the housing market will continue to stay strong. In the U.S., we continue to have limited inventory and high demand. Low mortgage rates will continue to entice those looking to buy.
- Business spending is forecast to increase in 2021 as consumer demand increases.
- Unemployment is expected to decrease from its current rate of 6.7% to 5% by the end of 2021.
- Inflation remains low. The Federal Reserve has a target rate of 2.0%, and we are expected to be there by the end of 2021.
- Last year was difficult for oil, with demand plummeting due to a decline in travel and an increase in remote work. Oil had its worst price decline (8.6%) since that measures has been tracked. By year-end 2021, oil is expected to be $60 per barrel, an increase of around 6.3% from current levels.
On the international scene, the U.S. is expected to grow more than Japan and Europe (this has been the case for the past ten years). China and India will grow at a much faster pace this year. GDP growth for those countries is expected to be in the 8.5-9.0% range.
ESG (Environmental, Social, Governance) investments, have been around for decades, but have achieved a mainstream presence in the financial world only in the past few years. The amount of money invested in ESG funds has increased 42% in the last two years. $1 out of every $3 invested is placed in a stock ESG fund. Here are some ways that ESG factors are affecting the financial world and broader world affairs:
- NASDAQ has established a mandate requiring corporations listed on its exchange to have at least one woman and one member of a minority group on their board of directors.
- The global commitment to reduce carbon emissions is gaining strength among individuals, corporations, and governments.
- The Federal Reserve has identified climate change as a financial risk.
- Shareholders proposals to corporate boards increasingly deal with ESG factors. During 2020, 66% of all shareholder proposals asked for more ESG measures to be implemented.
- In 2015, companies began signing on to the American Business Act on Climate Pledge. The administrators of this Act gave guidelines and those guidelines are now being checked and enforced. Over 150 companies joined and will now have to show that have reduced their carbon footprint in order to stay within the agreement.
As always, diversification remains a key part of our client portfolios. Financial planning continues to be the core of our services. As we witnessed first hand in 2020, a black swan event can never be discounted.
If you would like to read Larry Adam’s full Investment Quarterly report, please use the following link: https://www.raymondjames.com/branches/library/features/investment_strategy/investment_strategy.pdf
- Investment Strategy Quarterly. Raymond James. Chief Investment Officer Larry Adam. Volume 13, Issue 1, January 2021. (https://www.raymondjames.com/branches/library/features/investment_strategy/investment_strategy.pdf)
- 10 Themes for 2021 – Seeking the Thrill of Victory [Webinar]. Chief Investment Officer Larry Adam, Raymond James Financial. January 2021. (https://www.raymondjames.com/winkates/resources/2021/01/11/webinar-replay-10-themes-for-2021)
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Adams and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations.