2021 Outlook

Has there been a year, at least since the 60s, that we’ve been this glad to see end? We’re aware that the problems we encountered during 2020 have not vanished, but they seem at least slightly less severe going forward than they have been. There’s no need for a full accounting of medical, political, and social challenges we have and will face – but we will discuss the economic and capital market implications.

Review of 2020

The full-year capital market data belies the turmoil we experienced. U.S. stocks increased in value by 17%, although the high returns were concentrated in a few industries, including tech and healthcare stocks. Foreign stocks also performed well, with developed market stocks rising by 10% and emerging market stocks going up by 17%. Bonds also rose in value by 7%.* However, between mid-February and late March, stocks fell by over 30% in value, and many investors were in a state of panic. Volatility spiked again in September and didn’t subside until recently.

The Current State of Markets and the Economy

What confuses many investors, and specifically journalists covering investments, are two extreme dislocations. In normal times, the financial markets are a good indicator of the current state of the economy and small company conditions for the most part mirror the health of corporations in the S&P 500. When we see local restaurants and other businesses closing or facing dire circumstances, it’s difficult to imagine that large companies are 17% more valuable than they were a year ago. But many local businesses don’t have the luxury of having customers order on-line and employees working from home.

Moreover, while economic indicators are an indication of the recent past, stock prices are a forecast of the future – and there has likely never been a time in which the profit expectations for the next few years are expected to be more different than the past year. According to Standard and Poor’s, earnings for 2020 are projected by security analysts to be 23% lower than they were in 2019. However, in 2021, earnings are expected to grow by 38%. Economic indicators are driven by the 23% decline in current profitability – current stock prices are driven by the forecasted 38% growth in future profitability.

What About Bonds

The outlook for bonds – particularly Treasury bonds – is uninspiring. The yield on a ten-year Treasury bond is currently 0.9%. It’s difficult to imagine someone locking up their money until 2031 while getting a return that will almost certainly be lower than the rate of inflation. Of course, an investor can sell that bond in a few years, but if interest rates rise (which they will likely do), the bond will be sold at a loss. It seems like there is little reward and a fair amount of risk.

That being said, having bonds in your portfolio does reduce the overall volatility, and bonds have always provided higher long-term returns than short-term money markets. We suggest not buying long-term bonds (a five-year maturity provides much more flexibility) and diversifying into other bonds, such as corporate, that have higher yields.

Perspective

Last year in this space, on the heels of a fantastic decade of investing, we twisted the immortal quote from Franklin Roosevelt: “The only thing I have to fear is NO fear Itself.” Our point was that after large rises in the market, there is frequently overconfidence on the part of investors, and that overconfidence is particularly scary. There are always risks in the market – many are currently apparent, including efficacy of the vaccine, dangers of variants of the virus, delays in the economic recovery, and long-term impacts of the massive increase in government debt. But the greatest risk we continually face is the unpredictable event that comes out of nowhere. It’s because of that uncertainty that we will always have some degree of caution in our recommendations.

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* Source of returns is Morningstar, Inc. Past performance is not indicative of future results.

This update is provided by Savant Investment Group, LLC (“SIG” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that SIG believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

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