Those many tailwinds which I discussed in My Gut Feeling For 2020 – USMCA, China trade agreement, failed impeachment, and Boris Johnson’s election – that were present as the year began turned to headwinds. First came COVID and all the wrath that it brought upon us. Next came social unrest in the United States. Finally, we had the turmoil of the US elections. The saving grace was that there was a technological boomerang to those headwinds which presented opportunities of a generation in mobile, internet, work/stay-at-home and biotech sectors. After the challenges of 2020, which I successfully navigated (performance figures available upon request), I am not so quite sure that 2021 will be as forgiving.
Concerns for 2021
I have a multitude of macro concerns for the year ahead
- Global monetary and fiscal stimulus launched in 2020, and perhaps more to come in 2021, will unleash inflation, the magnitude of which we have not experienced for decades. While that might not appear early in 2021, it will begin to rear its ugly head late in the year.
- Leadership in Washington that is less business and tax friendly.
- Trade relations with China will take a different tack.
- A dramatic change in the structure of social networking (though that may also bear some opportunities – see #10).
- Of greatest importance, the inability for growth stocks to generate enough earnings to maintain their earnings multiples.
Predictions for 2021
Without further ado, in the spirit of the old Wall Street Week with Louis Rukeyser, wherein his panelists were asked at the outset of the year to make their predictions, which could not be changed thereafter, I present My Gut Feeling for 2021:
- Standard & Poor’s 500 (SPX) – 2021 High 4,500; Low 3,200; Close 4,032: The SPX ended 2020 at 3,756.07, which using Standard & Poor’s 500 (SPX) earnings estimates of about 135 (to be honest, it varies from 131 to 138 right now) implies an index price/earnings multiple (PE) of 27.82. From an historical basis, that high of PE is unsustainable. There is one caveat. Given the low rates of interest rates – the 10-year US Treasury of about 1% – that PE ratio is not all that unreasonable. On the earnings front, the problem is two-fold. First is that market earnings were greatly impacted by the COVID recession in the first half of the year. Second, there was a narrowing of earnings such that it was concentrated in several mega-cap tech names. To me, there are three risks to earnings. First, that interest rates and inflation rise. Second, a Biden tax bill that will send corporate income tax rates to 28% from the current 21%. I would note that is still better than the previous rates under Obama of 35%. Third, that states fail to inoculate their citizens with COVID vaccines fast enough. I would say that there is a silver lining. Corporations are going to benefit from refinancing their debt at much lower rates. That might offset some of the increases in taxes. Wall Street consensus estimates for 2021 SPX earnings is about 168. It is worth noting that pre-COVID 2019 SPX earnings were just about 163. When I put this all together, if interest rates remain tame – let us say at or below 1.5% for the 10-year US Treasury – I will apply a PE multiplier of 24 arriving at a year-end SPX price target of 4,032. That would produce another all-time high, an increase of nearly 7.35% from 2020’s year-end level of 3,756.07. I would note that a 7.35% increase in the index is just below long-term average rates of index growth. Markets do not move in straight lines, and we should expect several significant corrections along the way. I am calling for a 5-7% correction, more of a normal pullback to take place sometime in March or April. A more significant correction of 10-15% will occur in late summer or early fall as the reality of tax changes are imputed into 2022 earnings. So, along the way, expect the SPX to trade as low as 3,200 and as high as 4,500.
- The Federal Reserve Open Market Committee (FOMC) was on hold in 2020 and will continue to make no changes to its target rates in 2021. Employment will not return to pre-COVID levels and could likely remain sluggish throughout the year. This economic stagnation will force the FOMC to focus on its economic growth mandate but continue to place more burden on fiscal policy.
- Yield Curve – As for US Treasury securities; will the bottom in the yield curve finally arrive in 2021? It should if inflation picks up at a moderate pace allowing the FOMC to begin winding down the rate of asset purchases late in the year. That puts the FOMC at the center of an economic predicament of stagflation – stagnant economic growth with concurrent inflation. Stagflation should be transitory, not the sort of stagflation of the 1970s.
- Dividend / Value Stocks had a rough 2020. I expect that they will return to historical form and post reasonably positive gains of 6 – 10% on a total return basis if interest rates behave as I expect. Recall that value stocks never quite recovered to the same extent as growth stocks in 2020 and remain oversold on a comparable basis heading into 2021.
- Growth Stocks will not have a repeat of 2020 (or 2019 for that matter) as that pace of price gains are unsustainable. In 2020 Apple (AAPL) was up 80.75%, Amazon (AMZN) up 76.26%, Alphabet (GOOG) up 31%, Facebook (FB) up 33% and Twitter (TWTR) up 68.96%, to name a few. In fact, those “FANG” stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG), most of which peaked last summer, may no longer exhibit leadership. In technology growth, I prefer data and cybersecurity stocks.
- Formerly Shunned Sectors – Finally, after wandering the wilderness for a few years, financial and energy company shares will have a reawakening in 2021. In other words, you can begin to allocate capital back into those sectors; but I would not go hog wild. There are a few reasons for this opinion. First, the sectors are oversold on a relative basis. Second, earnings should improve for both sectors as energy prices increase (banks will benefit as energy credit quality improves). Lastly, these sectors’ higher dividend yields will attract investor attention. Still, you must be selective when choosing an energy or financial services company into which invest.
- US economic growth will be incalculable until such time as we return to an open economy. Even once that occurs, I do not expect to return to pre-COVID economic growth rates. As mentioned above, stagflation is a risk.
- Energy Prices – after a year or two of insignificance, oil prices will rise and spike to levels not seen in several years. Expect West Texas Intermediate crude oil to trade over $70/bbl. but settle in the $60s by the end of the year. There are a few contributing factors to these predictions. Energy policy from the Biden administration such as, but not limited to, cancellation of the Keystone XL pipeline will reverse energy independence achieved during the Trump years. Also, we should expect some exogenous energy event. It could be from Iran or some other source. Don’t rule out some terrorist attack on the 20th anniversary of 9/11.
- Politics – We have had enough of politics for a lifetime. Still, it will get interesting on Capital Hill. Expect a block of centrist / moderates on both sides of the aisle to act as a De Facto third-party block when it comes to voting. This group includes Joe Manchin (D-WV), Krysten Sinema (D-AZ), Jon Tester (D-MT), Susan Collins (R-ME) and Lisa Murkowski (R-AK). The sixty vote Cloture will remain in effect. No new states will be admitted to the union. The recall movement of California Governor Gavin Newsom will garner national attention. Win or lose, the exodus from California will continue. In fact, the exodus or as I referred to it as “The Big Move” from high tax states, which I predicted a decade ago will continue, with some modifications as COVID is driving people out of large cities as well.
- Social Networks / Cloud – Did you notice that I did not mention Microsoft (MSFT) anywhere above? That stock rose 41.04% last year but closed 2020 4.48% off its year high set in the first half of the year. MSFT has remined quiet in the recent actions taken by TWTR, FB, AAPL and AMZN to squelch free speech. MSFT Azure is second to AWS (Amazon Web Services) in the cloud provider business. Alibaba (BABA) Cloud and IBM have also been silent. Maybe IBM under its current new and improved leadership, will finally make some hay out of its Red Hat acquisition. There is also cloud wannabe Oracle (ORCL), headed by Larry Ellison. Do not forget that ORCL is in a deal to buy the US assets of TikTok. Expect one or all these companies to take advantage of actions taken by TWTR, FB, AAPL and AMZN to become major powers in cloud computing and social networking.
Best wishes for a Happy and Healthy 2021. As always, please contact me if I can help you with your investment needs or for media appearances. Also, feel free to post your comments / questions to My Gut Feeling and pass it on to relatives, friends, and colleagues throughout the year.
[ Personal Note: I had originally written this two weeks ago but got a little delayed with publication for personal reasons. First, Michael Stadulis, the gentleman who designed and hosted this site passed away. We went dark for a few days but went back up and running earlier this week when the site got moved to a new server. Next, a dear old friend of over 40 years, William Machover passed away I was a little distracted with his memorial and remembering him with friends. ]
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, AMZN, MSFT, SPY, SSO & SPXL; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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