THOUGHTS ON THE MARKET OUTLOOK AS OF JANUARY 2021

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Though no one knows how the various stock markets will fare in any given year, there are a number of reasons to be positive in 2021.

  1. A successful vaccine rollout should help to restore a sense of normalcy to the world, with less of a day-to-day focus on the very real impacts of COVID-19. After an expected rough first quarter, economic growth should return and be positive for the full year as restrictions around the world ease.
  2. U.S. politics could settle down with the exit of President Trump. With the arrival of President Biden and a slim Democratic majority in the House and Senate, fiscal and monetary stimulus should continue to be very accommodative in the U.S.. A similar accommodative environment is also expected to continue around the world.
  3. Against this backdrop, consensus expectations are for real GDP to grow by approximately 4% in both Canada and the U.S., employment is expected to grow and inflation is expected to remain less than 2%. Long dated interest rates may rise but the expectation is that they will remain historically low. Short term rates are expected to stay low for the foreseeable future.

Despite these reasons for optimism, there are negatives to overcome – both known and unknown. With the worst of coronavirus pandemic in the developed world potentially still to come this winter, the struggle will continue particularly for those at the lower end of the economic spectrum. Continued economic dislocation is expected even as we accelerate toward a more digital economy. Stocks could be vulnerable in the short-term as many of the positives and much of the optimism has already been priced into the markets. Any decline, however, should amount to a correction and not a crash. Instead, it is more likely that we see some profit taking in sectors trading at extremely high valuations and a sector rotation into more reasonably valued areas. With that said, very low interest rates and massive money supply increases continue to generally support valuations that are higher than historic norms. Higher valuations are also supported by a heavier weighting in the market indices of companies that have higher growth rates and higher returns on invested capital. Markets will pay more for such companies than those with much lower or no growth rates and lower returns on invested capital.

On a long-term basis, our area of focus, the world will recover from this current pandemic and return to growth. Global GDP has increased from $22.6 trillion to $87.7 trillion over the last 30 years, an average annual growth rate of 4.6%. If global growth averages only 2% over the next 10 years, global GDP would amount to $109 trillion, an increase of $21 trillion. This growth should provide ample opportunity to make money in stocks, especially with a well selected portfolio. Investing in companies that participate in the long term growth in our economies through the profitable sale of goods and services that people want and need will generally lead to a successful investment outcome in the long run. There will be many ups and downs in the market, including some drops similar to the one experienced in early 2020 that will create a lot of fear. Knowing that these drops have historically been temporary, investing in businesses that continue to be successful (through good times and bad) is what has historically provided the underpinnings of a fruitful long term investment strategy. We expect the success of this strategy to continue.

Wishing you a healthy, happy and prosperous 2021.

Tyson Charlebois