Interview, Fireside Chat
2021 Investment Outlook: “US Resilient”
- The firm recommends maintaining a preponderance of assets in U.S. equities and U.S. private equity, citing intact and resilient U.S. preeminence.
- The S&P 500 is projected to annualize approximately 18% from March 2009 through the end of 2020, far outperforming other developed and emerging market equities.
- Corporate management is expected to demonstrate resilience by generating reasonable earnings relative to pandemic-era expectations.
- U.S. companies are forecast to deliver 5% better annual earnings per share growth on average compared to counterparts in Europe, the UK, Japan, and emerging markets since 2007, including a 10% per year advantage in technology.
- China is expected to end 2021 with a GDP approximately 10% higher than the end of 2019, remaining the only country to achieve such robust growth.
- Emerging market performance is anticipated to be mixed, with smaller countries likely performing poorly and India recovering from a significant 2020 downturn.
- The base case for U.S. equity returns in 2021 is an 8% total return (composed of 6% price return and 2% dividends) with a 60% probability.
- An upside scenario with total returns of approximately 17% to 18% is assigned a 25% probability, a view similar to David Koston's base case for Goldman Sachs.
- A downside scenario where the market declines by 17% to 18% is assigned a roughly 15% probability.
- Fixed income instruments are expected to provide moderately negative returns of minus 1% to minus 2% for longer maturity securities, while short-duration instruments like cash are expected to return approximately zero.
- High-quality U.S. fixed income is viewed as the only reliable hedge against downdrafts, deflation, and unforeseen shocks such as cybersecurity issues, US-China relations, and domestic political tensions.
- Bank loans are expected to offer a more attractive risk-return tradeoff than generic corporate high yield securities, characterized by less interest rate sensitivity and higher credit quality.
- Uncertainty surrounds vaccine efficacy against variants from the UK, South Africa, and Brazil, with Moderna and Pfizer considering booster shots, creating risks regarding the ability to vaccinate enough people before variants become more prevalent by the end of 2021.
- Potential upside risk to growth exists depending on whether the U.S. fiscal stimulus package exceeds the anticipated one trillion dollars or if a second package is enacted later in 2021.
- Consumer spending may exceed modeling estimates due to pent-up demand and a U.S. savings rate that rose from about 8% entering the pandemic to the low teens.
- Investors are warned that exogenous shocks such as pandemics, cyber events, or geopolitical shifts cannot be anticipated, and attempting to invest in anticipation of such events may lead to missing market recoveries.