What a year 2020 has been and very few could have predicted how it would play out… Starting with a once in a century pandemic leading to the fastest drop in the history of the equities markets and then to the sharp rebound finishing to new highs. Sadly, it is worth noting that while the economy is rebounding, it has left many unemployed with many families continuing to be dramatically impacted by the consequence of this pandemic.
As we wind down the year, it might be worth looking at what could lie ahead. While for the financial community this common exercise complex and fraught with uncertainty, it is nonetheless a worthwhile one. Putting a time stamp on views and opinions can be very valuable on the quest to improves one’s framework and thought process… (*)
So, without delay, here is a list of 7 predictions for 2021… as always these shouldn’t be taken as investment advice or trade recommendations. These are just my own personal views offered to the public at large and not to any one particular investor.
1) The US GDP will be back above pre-pandemic level in 2021.
With the vaccines coming, it is likely the economic recovery will continue next year (albeit there could be some bumps). Further stimulus should also provide more tailwind to the economy. Currently (as of the Q3 2020 data) the US GDP sits around 3.5% below its pre-Covid high. It is likely the economy will grow by a larger amount next year.
2) Inflation (as measure by PCE) will finish next year above current level (1.45%).
Following the GDP call we should also expect unemployment to keep coming down in 2021. With an improved employment landscape, we should also see some firming in prices. This, especially as inflation seems relatively low compared to the current unemployment level (as can be seen below.
3) The S&P 500 to finish below 4000.
While next year should be great for the economy, the stock market could take a back seat. This is particularly likely given that an abundance of good news has already been priced in by the markets. It is also worth noting that over the last two years, the S&P 500 has increased by close to 50%. Following such a strong performance, it wouldn’t be surprising for equities to take a bit of a breather in 2021. While corporate earnings should continue to recover next year, we should also expect the Price/Earnings to not expand much more from the current elevate levels. This should act as a buffer against a sharp appreciation in the stock market.
4) The 10-year Treasuries yield will touch 1.35%.
Along with continued economic improvement, we should also expect government bonds yields to climb higher next year. As the chart below shows, the current PMI levels already warrants higher Treasuries yields.
5) Corporate High Yield bonds will generate positive returns.
The continued improvement in the economic picture next year should benefit the corporate credit market. In this environment, we should expect high yield corporate bonds to generate a positive return for investors next year.
6) Gold won’t make a new high.
The ongoing economic growth combined with the potential for higher yields should act as a deterrent for a significant appreciation in gold. Furthermore, in this context we shouldn’t expect real yields (the difference between nominal yield and inflation expectation) to drop much further from their current ultra-low levels. This potential for higher real yields should create some headwinds for additional gold appreciation.
7) Oil will trade above $55.
This year oil has been a relative laggard compared to other industrial commodities. The improved economic environment next year should stimulate demand and help oil to play catch-up with a continued move higher.
As mentioned above, this prediction exercise is far from perfect science, but at least it affords us a great opportunity to think about what might lie ahead. Happy holidays and let’s see what 2021 brings…
(*) For those who are curious, here were my predictions for 2020s … there were some nice hits and alas, definitely some big misses…
Disclaimer: The views and opinions in this piece are just the author's own, offered to the public at large and not to any one particular investor.