What’s the script for the 2021 financial markets?
After rave reviews for last year’s performance, a standing-room-only crowd is expecting above average performance in 2021. Rarely is the sequel as good as the fans expect, and the extreme bullish sentiment in both the equity and credit markets does give me pause. We are likely to experience above average economic and profit growth in 2021 with the efficient distribution of an effective vaccine. But, much of the anticipated 2021 good news is already priced into current market levels. However, high valuations aren’t a sufficient catalyst for us to get bearish, especially since we are expecting better earnings, and interest rates are likely to remain low.
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!
This report was prepared by J. Brian Henderson, CFA, Chief Investment Officer for BOK Financial.
More from the Report:
"2020: The Movie" through a market lens
A suspenseful horror film with a happy ending…at least for the financial markets. S&P hits a new all-time high; even the bond market bounced back.
CARES Act, interest rate cuts with more quantitative easing and vaccine process set the stage for a sequel.
2021 – An encore? Possible…perhaps even probable
Economic recovery may have an intermission until the vaccine is more widely distributed later this year.
Passage of major tax and spending programs is unlikely, but expect a Biden presidency to bring change to U.S. economic, regulatory and international policies.
Look for vaccines to be center stage in releasing pent-up demand for travel and live, in person experiences – an economic shot in the arm that could mean annualized quarterly growth rates as high as 6% by summer.
Arm-chair predictions for overall 2021 market performance
- U.S. Equities – Single digit returns
- High Grade Bonds – Low starting yields and improving GPD growth will make for a tough year as long-term rates creep up
- International Markets – More room to run as the global economy improves
- Bottom line – Above average economic growth and average market returns