The COVID-19 pandemic that arrived last year will likely make 2020 a year we will likely never forget. Enduring shutdowns, wearing face masks, and finding stores empty of necessities such as TP and hand sanitizer was reason alone to look forward to a new year.
From a financial market perspective, 2020 witnessed a speeding up of trends that were largely already in place. For example, technologies and companies associated with working away from a central office, tele-medicine, e-commerce, video streaming, digital payment processing, home improvement, and food related staples stocks were clear beneficiaries. On the other hand, companies negatively impacted by the pandemic, included travel, energy, traditional retail, and restaurants.
As the 2021 reopening continues to materialize, separating the winners from the losers will be the No.1 job for investors. In my view, the post pandemic economy is going to look different than the one we had in January 2020. Assuming we obtain some level of herd immunity by this summer, investors will likely witness the resumption of some macro trends that were already starting or were likely to start in 2020.
Those trends are as follows:
- Secular bull market for commodities
- Secular bear market for the US dollar
- International and emerging markets outperform US equities this decade (2020-2029)
This is not to say that 2021 will not have its challenges and risks. We have entered a new year with US equities likely to be restrained by high valuations. This is particularly the case in the sectors that were beneficiaries of the pandemic (i.e., tech, social media, e-commerce, video streaming, etc.). Because these companies are the largest by market capitalization (i.e. size) their performance will continue have a big impact on US equity indices such as the S&P 500 and more specifically the NASDAQ 100. Additionally, US equities as measured by the S&P 500 have been up 16 out of the last 18 years (2003-2020) for a record 89% of the time. Historically, stocks have risen 68% of the time going back to 1833. So, between high valuations, longer term history, and relatively high investor sentiment that exists presently, I would argue that being more conservative than normal will likely prove to be prudent over the next few years.
However, there are a few exceptions to this word of caution. The energy sector entered 2020 at historically low valuations and was among the sectors negatively impacted by the shutdown. Thus, as we entered 2021, the energy sector has benefitted from both an attractive risk/reward as an undervalued sector that is also benefiting from a pricing in of a more fully reopened global economy. Additionally, commodities, international developed and emerging market equities too are more reasonably valued at current levels for long term investors.
For more details on these views, I am including a link to the slides from my January webcast titled “Hindsight is 2020 – 2021 Outlook” for your review. If these slide prompt questions or comments, don’t hesitate to reach out to me at [email protected].
Also, be on the lookout for my mid-year market update webcast that is scheduled to take place on Thursday, July 15th at 3 PM (CST). To register for the live webcast, click this link.
Here’s to the reopening and putting the pandemic behind us!
T. Doug Dale, Jr. – Client Advisor