The Federal Reserve is expected to continue to support the risk markets with its balance sheet expansion that keeps P/E multiples elevated and credit spreads tight. Unlike the multi-pronged expansion that drove markets higher in 2020, returns this year likely will be driven primarily by earnings, which are expected to be much better.
Like the cinema schedule these days, our expectations are subject to change without notice, but at this point we expect positive equity market performance, particularly for the first half of the year. Given high valuations, I lean towards single digit returns overall for the U.S. equity markets for the full year. With the historic low starting yields in the bond market and improving GDP growth, it’s going to be a tough year for high grade bonds to generate much return as long-term rates drift higher. After warming up to the equity markets this past summer, we favored an overweight to U.S. equities with an emphasis on the tech-heavy large cap growth stocks. After realizing earlier than expected gains, we preferred equities even more so, anticipating the FDA vaccine approval, but swung towards the more cyclical value-based stocks that had been lagging the recovery. After the first round of positive vaccine news was announced in early November and value stocks posted meaningful gains, we reduced our preference to value while still seeing opportunity for value to outperform growth. We continue to monitor the developed and emerging international markets for an opportunity to potentially increase exposure, since the indices are more cyclically exposed and have relatively more upside to run as the global economy improves and the U.S. dollar trades lower on average. Bottom line: We are expecting above average economic growth and average market returns in 2021. Here’s to a prosperous New Year!