January 16, 2021 Weekly Market Update. The equity markets took a breather by giving back past gains with losses led by the Nasdaq -1.54% followed by the S&P 500 -1.48 and the Dow Jones -0.91%. The lofty $1.9 billion Biden Economic Rescue Package was offset with sobering economic news of higher than expected 965,000 job claims, spiking coronavirus cases engendering further business restrictions and consumer confidence edging downward to 79.2 from 80.7. However, earnings week launched with banks reporting stellar quarterly financial results.
January 9, 2021: Recap & Investing Outlook Vignette Excerpt: Stock Market Forecast
During this extraordinary 2020 period of negative and volatile markets, our firm’s model portfolio continually shifted from its traditional market holdings by incrementally adjusting to more cash, then when unimaginable amount of government stimulus was infused into the economy, along with an extraordinary amount of Federal Reserve asset purchases (even high yield debt), we also incrementally shifted client portfolios back into greater and greater equity exposure.
The stock market enters 2021 with favorable trends: 1) vaccines should thwart the spread of Covid-19; 2) S&P 500 earnings are expected to keep rebounding; 3) the Federal Reserve has assured markets that it won't raise interest rates; and 4) the government signed a new round of fiscal stimulus into law. Indeed, there are several catalysts we already know about that has already initially push the market higher.
A Covid-19 vaccine will continue to expand in the early months of 2021 to where distribution in the U.S. should be widespread and the Federal Reserve intends to keep interest rates low for the foreseeable future. Government spending should continue to spike with additional stimulus and perhaps the much-anticipated infrastructure bill. However, the unknowns include how robust the economic recovery will be, the timing of another stimulus package from Congress, and the broader impact of new regulations, including the potential for more aggressive tax regimes.
In tandem with the abovementioned 2021 tailwind factors, investors should also benefit from a couple of other positive market forces. First, since there isn’t really any other viable return alternatives to stocks at the moment, with bond & other fixed-income yields nearing all-time lows, then stocks should continue to be the most alluring asset class. Second, there is a wave of retirees that must rely on financial asset returns and this establishes both foundational support and positive momentum for much of 2021. This crescendo of demand translates to more buyers than sellers, which in its simplest form, moves stocks higher. From another perspective, how many investors are looking to offload stocks before additional stimulus given there isn’t much competing return options elsewhere? This low interest rate backdrop should encourage investors to continue favoring equities relative to bonds.
2021 Portfolio Strategies:
This year’s asset allocation theme will be to share in the upside of a rising stock market with diversity of asset allocations. We believe that stock market sentiment is generally favorable but also expect volatility given elevated valuations. We will continue to hold individual stocks, individual bonds, exchange traded funds (ETFs) with exposure to both these classes, along with some mutual funds that provide needed asset and strategy diversity
During the stock market extremities of last year, new investment vehicles were launched to better cope with the new market loss risk realities, such as defined outcome exchange traded funds (ETFs). The most common reason for using defined outcome investing is for the ability to invest with some measure of known downside protection. Over long periods of time, the stock market has tended to go up. But over shorter periods, stock market losses are common and unpredictable.
The investing world has many risks, many which are unknowable and with the S&P 500 trading at a rich 25 forward looking price-earnings (PE) ratio compared to the historical mean is about 19 that then it is important to have safeguards in place. Therefore, we will continue to use defined outlook ETFs to track the return of the S&P 500 (up to a predetermined cap or others uncapped ETFs) while buffering investors against a range of losses over the outcome period, such as 9-15% of the initial market losses. In this investment climate where the printing machine has distorted the underpinnings of relative valuations with “funny money” the prospects of using ETFs that offer the potential for double-digit upside returns with similar downside buffers is compelling for the risk tolerances of our client base.
January 1, 2021 Weekly Market Update. For the last week of the year the market retrenched on news of lower stimulus checks and uncertainty over which party will control of the Senate given the close Georgia elections: The S&P 500 -1.43%, the Dow -1.35% and the Nasdaq -0.65%. However, for the year all U.S. markets finished positive in the throws of an -30% economic contraction and if anything, this can be best summed-up by former Fed Chair Janet Yellen, “The stock market isn’t the economy.” Interestingly, over 50% of the S&P 500®’s gains for the year just came from three stocks: Apple, Amazon and Microsoft. Our 2021 outlook newsletter (clients only) is still being researched and drafted, but with government printing machine still working on overdrive we expect further gains again – at least for the first half of the year (albeit with some intermittent stock fluctuations).