STOCKS WILL DO WELL, AND MORE FEARLESS PREDICTIONS FOR 2021
Taxes and inflation not big worries, at least not yet, Peter Hodson writes.
It is that time again when we make our fearless predictions for the year ahead.
First, though, let see how we did in our predictions for 2020. In a column dated Dec. 27, 2019, we predicted the following: (1)
U.S. markets will beat Canada. (2) Interest rates will stay low. (3) Bank stocks will recover. (4) Technology shares will lead. (5) Equity money flows will increase.
And, the judges' decision: “A” or 85 per cent. We were clearly right on four of five, and gain a few points with the giant financial sector rally of the past seven weeks. But, the financial sector still lagged the TSX and is down 3.8 per cent this year, so we can't go five-for-five this year, like we did in 2019. But U.S. markets crushed Canada, tech shares led the way, interest rates hit record lows and money surged into equities, despite a worldwide pandemic.
So, having been right on nine of ten predictions in the past two years, we can almost guarantee we are going to be wrong in our 2021 calls. After all, market predictions are really barely more than a guess. 2020 certainly proved this: we don't know anyone who predicted a global pandemic, a world shutdown and a subsequent giant stock rally. So, with giant “reader beware” warnings, here are our fearless predictions for 2021:
1)
Technology shares will still lead Many investors are fretting about a growth-to-value market shift. But we see no reason why tech stocks can't still do well next year. After all, if you account for the massive cash positions at many tech companies, some of them are not nearly as expensive as investors might think. In addition, after a good year, investors may become more confident in general and continue to be comfortable paying “up” for growth. A company such as Crowdstrike (CRWD on Nasdaq) grew at 86 per cent last quarter. We are not sure why such high growth needs to be unattractive all of a
sudden.
2) Inflation will still not be a big concern
Copper has moved to multiyear highs, oil is recovering and many see high inflation as the next big thing. We are not so sure. There is still a lot of excess capacity in the world, and still an awful lot of unemployed workers. Going into the pandemic, finding qualified workers was the biggest problem for companies. Now, it is much easier. Wage pressure has diminished. Now, don't get us wrong: central banks want to have inflation, and some will be good for the recovery. But we think high inflation is a problem for a few years down the road, and not likely to be a big influence in 2021.
3) Taxes are not going to go significantly higher (yet)
We are sure this will be controversial. “Everyone” knows governments are broke. “Taxes have to go up next year,” they say. We agree with this, but not necessarily with the timing. We think governments are smart enough (did we really just type that sentence?) to realize that they have to let a recovery take hold before they shut it down with higher taxes. Plus, there might very well be an election in Canada next year. Any politician knows the best way to lose power is by raising taxes. So yes, big tax hikes are coming: but they might not show up as fast as investors think. Of course, we are counting on governments doing the right thing here, so by default this is our riskiest prediction.
4) Monopolies will not be broken up
So much ink ( bytes?) has been spilled regarding the possible break up of companies such as Amazon, Facebook and Alphabet. But we think it is just noise. Investors, for one, simply don't care. It is very possible that a busted-up Facebook is worth far more in pieces than it is as a conglomerate. Currently, the mega-companies may be reluctant to make big acquisitions, for fear of getting even more antitrust scrutiny. But a broken-up Alphabet might see its newly spun-out subsidiaries go on a massive buying binge of companies, and more “mega cap” conglomerates might be born as a result. Politicians like to make points about breaking up monopolies, but at the end of the day it is hard to accomplish, and these companies have created hundreds of thousands of jobs with their success and growth. It is simply not the American way to punish success.
5) Stock markets will have a very good year
Let's take a look at the big picture: investors are more confident. Consumers are becoming more confident with vaccine news. There is a giant pent-up demand for travel and shopping. The world is awash in cheap money. The stock market had a good year when everyone expected a bad year. Companies (on average) skated through the pandemic just fine. Business found a way. Yet, pessimism reigns supreme. We can't open up an email these days without reading about how this sector or the other is massively overvalued, or that “a crash is coming.” We don't buy into it. With cash paying zero, bonds paying close to zero, and jobs and the economy set to recover, we would be more bullish than most for the market's outlook in 2021. Sure, we will likely get a five per cent or 10 per cent correction along the way, but we would not expect giant problems in the market. Again, maybe in 20 months, but not for a one-year forecast.
As always, we reserve the right to be very wrong on all of these predictions.
Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. Peter is also Associate Portfolio Manager for the i2i Long/ Short U.S. Equity Fund.