2020 FOURTH QUARTER NEWSLETTER

   As the New Year began, we were on vacation and had extra time for reading and television. We noted there were fewer programs featuring 2021 predictions than we expected. Perhaps because 2020 was so unpredictable fewer prognosticators dare speculate 2021. Maybe the focus on what will happen with the Pandemic now that several vaccines are in distribution has dulled our appetite for non-COVID related predictions. In any case, we still found several analysts we follow offering outlooks for investing in 2021.

  At this time of year, we always like to look back at the previous January to see how those investment related predictions matched up with reality. As you might expect, few market analysts considered a Pandemic. Wikipedia puts the start of the “Corona Virus Crash” from 2/20-4/7/20.[1]

  Some time ago, Robert Doll, CFA and Senior Portfolio Manager for Nuveen, published ‘10 Predictions for the New Year.’ You can read the whole article at www.nuveen.com under Investment Outlook 05-January 2021. Last year’s number one prediction was “the world avoids a recession as U.S. GDP grows over 2% and Global GDP grows over 3%.”[2] Now we know the U.S., and the world, experienced a deep recession, and in some nations, a depression. The U.S. saw some recovery in the 4^th quarter, but Wikipedia describes the COVID-19 Recession as the worst global economic crisis since the Great Depression.[3]

  Doll’s article discusses signs of global economic improvement. His number one prediction for 2021 is, “U.S. real GDP will increase at the fastest pace in 20 years,” and he expects the U.S. will be in expansion mode again by the 3^rd quarter, maybe even by the 2^nd. Last year’s number four prediction was stocks, bonds, and cash would all return under 5%, “for only the 4th time in 25 years.” Bloomberg Barclay posted year-end domestic stock returns at +7.3% for the DJIA, 16.3% for the S&P, and 43.6% for the NASD, and the U.S. Aggregated Bond Index was up 7.5% for 2020.[4] For 2021, Doll’s number 4 prediction is that “stocks reach a new high for the 12th consecutive year but fail to keep pace with strong earnings growth.” Doll feels the strong market recovery we saw in the latter part of this year, “has probably burrowed some from 2021.”[5] 

  So, where might we see market growth in the year ahead? Many analysts are highlighting dividend stocks with reliable dividend history. Value stocks did not participate as much as growth stocks in the 2020 market rebound. While they outperformed in the 4^th quarter, the S&P Value Index has underperformed growth significantly for the past 5 years. Expected yields on cash and bonds in 2021 make stocks with reliable and growing dividends attractive in comparison.

  Yahoo published on 1/8, “Zach’s Outlook and Picks for 2021,” reviewing that Democratic control of Congress may lead to a large fiscal stimulus package, and a new focus on infrastructure. As vaccines roll out, the economy may be able to begin recovering faster.[6] Similar predictions can be read on SmartTrust’s, “Weekly Capital Markets Update,” which states these patterns can be found “based on historic returns associated with periods when political power was split in Washington D.C.”[7] Many felt Republican control of the Senate would be a positive for the stock market, and loss of control, a negative. However, initial reaction to the Georgia Senate run offs is focusing on opportunities for investors with a hefty stimulus package, continued distribution of vaccines, and the possibility of a significant infrastructure bill with Democrat control. Healthcare stocks and Financials are among those seen as benefitting.

  On the bond front, Cumberland Advisors published its Market Commentary-Q4 in January. They note downgrades by rating agencies dramatically outpaced upgrades in 2020, but the ratio improved significantly in the 4^th quarter. Overall, investment grade muni issuers had strong cash reserves going into the crisis. Market disruption at the height of selling in the “COVID Crash” was especially painful for the muni bond market, but action by the Fed and Congress soon resolved those trading issues.  Munis did better in the latter half of 2020, but still lagged Treasuries, Global Bonds, and U.S. Bonds at year-end.[8]

  Franklin Templeton’s, Jan. 11^th article, “What Happened Last Week,” showed the 1-yr-return on munis at 4.5%, 10-yr Treasury at 6.6%, Global Bonds at 8.8%, and U.S. Bonds at 6.4%. The article notes the two major muni bond insurers are healthy, and with the anticipation of additional taxes and fees over the coming years under a Democratic administration, it should make tax exempt bonds more desirable. Infrastructure spending along with a focus on ESG (Environmental, Social, and Governance) related investing could benefit munis.[9]

  We can expect an interesting year, with a hopefully improving COVID situation as the vaccine rollout continues, and a new playing field in D.C. We should also expect some surprises, good and bad. We will be looking for investment opportunities, watching the effects of our changing domestic and global landscape on both star performers and laggards in last year’s market. And we continue to practice caution, patience, and humility in our efforts to grow our clients’ investments. We especially look forward to working with you and continuing to earn your trust as the year unfolds.

Happy New Year!

The Galarneau Group