New year, same complex financial markets. Lauren and Robert take stock of the year that was, and the themes shaping the economy and financial markets in 2021.
New year, same complex financial markets. Lauren and Robert take stock of the year that was, and the themes shaping the economy and financial markets in 2021.
Lauren Goodwin: New year, same complex financial markets. We’ll take stock of the year that was, and what investors have to look forward to in 2021.
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Lauren Goodwin: Live from our respective coronavirus social distancing outposts, I’m Lauren Goodwin.
Robert Serenbetz: And I’m Robert Serenbetz
Lauren: and this is Market Matters from New York Life Investments.
Robert: In this podcast, we the strategists at New York Life Investments will share insights from the Multi Asset Solutions team: what we think matters as we manage investment solutions.
Lauren: That includes Mainstays’ diversified portfolio series, including the Income Builder fund, as well as individual solutions for our partners.
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Lauren: Welcome everybody, it’s the week of January 11, 2021, and in this first episode of the new year, I’d like to say Happy New Year, Robert!
Robert: Happy New year!
Lauren: If you’re anything like us, you spent a lot of time in 2020 readjusting personal and professional life, making a bit of a break at the end of the year very much appreciated. But it’s great to be back and we have a really awesome lineup of content for you this year: lots great topics, great guests, listener questions – nudge nudge to you listening! – and I’m sure we can expect some market surprises.
Robert: If you’re anything like us, a bit of a break over the holidays also means it’s time to push the refresh button and take stock – no pun intended – of the economic and market setup we have for 2021.
Lauren: And there’s already plenty to talk about. If we wanted to torture our listeners with frameworks, we could say that, once again, the “news of the day” still impacts investment strategy through two main factors….
Robert: The virus and policy.
Lauren: That’s right, and we will get to both of those things But for the sake of a fresh start, let’s first recap how we ended 2020. Robert, take us through it.
Robert: Hard to believe this but saw the best Year End Rally (November-December) this year in S&P 500 which came on the tail end of an already very strong year. Its been all about reflation – the market expectations for a gradual improvement in the health situation and therefore the economy – remained the dominant theme to end the year. Three important themes under the surface:
1) Value outperformed Growth by 5% in Q4, but its mostly concentrated in 4 “good news” days (Pfizer, Moderna and AstraZeneca announcements, and Janet Yellen’s selection for Treasury). This is in-line with what we have heard earlier, rotation into Value is usually very fast and furious!
2) Small caps have seen the strongest outperformance in that time
3) Inflation expectations have recovered sharply suggesting that bond investors see the potential for some inflation just around the corner.
Lauren: Our listeners from last year will note that this is basically what we expect going forward. On one hand, we expect financial markets to be dominated mostly by reflationary forces, namely an improving economic environment. At the same time, fiscal and monetary policy look likely to stay supportive throughout this year. That should be broadly supportive of risk assets in 2021.
Robert: This strong equity market momentum seems like it will carry over into 2021. Historically, after a strong yearend rally, the momentum continued, and we saw a strong January in most of these cases (9 out of 10). It is 100% of the cases if we only look at cases with 10%+ performance.
I don’t want to brush by the policy factor that you just mentioned. I don’t expect many major changes from the Fed this year, but the last week resulted in some pretty interesting developments on the fiscal policy front.
Lauren: Yes, that’s right. After election day in November, the Senate had 50 republican seats, 48 Democratic seats, and 2 seats up for grabs in Georgia. Last week’s runoff election resulted in both seats going to Democrats, meaning that the Senate has a 50/50 split, with Vice President Kamala Harris being the tiebreaking vote.
Robert: Would you say that Democrats got their sweep after all?
Lauren: Yes and no. “Yes” in that Democrats have control of the White House and House of Representatives, and technical control of the Senate. But this doesn't mean the Democrats now have free rein to pursue some of the policies investors were most concerned about, such as sweeping healthcare reform or big overhauls of environmental policy.
Robert: But there are some areas where it will make a difference. Joe Biden will have a much easier task getting his key administration nominees confirmed. He will also be able to fill Fed Board vacancies. Both of those are very relevant for policy and for investors. The Georgia results also increase the chances that the stimulus payments will be raised from $600 to $2,000, which could have a swift impact on the economy this year.
Lauren: It does, although a more sweeping stimulus package would be harder. I agree with your point though, which is that more policy changes – a modest tax hike, drug pricing, some environmental regulation – are back on the table. We’ll discuss those implications in just a minute in our portfolio pause. But we can’t end this conversation with out briefly mentioning the risks to our otherwise constructive perspective on financial markets.
Robert: That’s right. Volatility is a part of investing life, and 2020 definitely showed us that we never know exactly what will disrupt markets – or the timing on which those disruptions will matter.
Lauren: Do you think that last week’s unrest around the Capitol building is an example of that?
Robert: It definitely adds uncertainty. Understanding the basic paths that our major political parties will take, physical security, stability of legal and Congressional processes… these are all important risk factors that investors can’t take for granted.
Lauren: Hmmm.
Robert: For now, though, the big “known unknown” for the markets is still the virus.
Lauren: Say more about that.
Robert: The ongoing virus wave in the U.S. and other countries is scary. There appears to be broad investor consensus that deteriorating hospital capacity, new strains of the virus, and restrictions on economic activity won’t affect corporate profitability in 2021.
Lauren: A view that we share, at least on the highest level.
Robert: True. But therein lies the risk. If investors are looking past the current risks, but then something happens – a new strain proves even more hazardous, vaccine timelines continue to undershoot expectations – then that could result in a growth scare, too. So, while we’re constructive about markets generally, we have to go into the year wide-eyed with the potential for change: on the virus front and now on the policy front, too.
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Lauren: Now it’s time for our portfolio pause, a segment of the podcast where we discuss an investment idea.
Robert: It’ll be a super quick one today, but we can’t discuss all of those expectations for 2021 without mentioning what it means for investments.
Lauren: The main aspect of our investment thesis for this year is positive: the virus will gradually move into the rear-view window, which is good for economic activity, for our lives, and hopefully for investments, too. As a result, we’re focused on rotation, the idea of a swift change in market leadership towards the asset classes that benefit when investors anticipate economic improvement: : value stocks, small caps, international equity, and the higher-quality segments of the high yield corporate bond market
Robert: But we’re not out of the woods yet. For our clients, we’re always focused on resiliency, and so what I am going to say is nothing new. But in a highly uncertain environment with high valuations, we also have to be focused on quality: companies with strong balance sheets, reliable cash flows, and dependable management teams. Investors looking to build resiliency against market volatility could consider building income across asset classes.
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Lauren: We will build on that and so much more in the Market Matters podcast this year. We are so excited to be back with you, and have received truly fabulous questions and ideas we receive from you: our listeners.
Robert: In the year ahead, we’ll talk about technological transformation of investment opportunities, and investment managers themselves.
Lauren: We’ll talk about the dollar, crypto, and digital currencies.
Robert: We’ll cover corporate debt..
Lauren: … and government debt!...
Robert: … and maybe debunk some of the traps investors commonly consider on those topics.
Lauren: We’ll talk about geopolitics, a new world order, and U.S.-China competition.
Robert: We’ll talk about ESG
Lauren: And the Fed.
Robert: So much Fed.
Lauren: And inflation and rates.
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Lauren: And with each of these topics, and the ones we surely can’t anticipate we’ll be here to help you navigate why they matter for investments. But for today, we’ll just say, once again, Happy New Year. We are so excited for the year ahead, and will be back next week for more Market Matters.
Robert: Let us know what matters to you.
Lauren: If you have a question or topic of interest, reach out to us on social media. As you can see, we really do consider them.
Robert: That’s right. You can send us your questions or highlight what matters to you by finding us on LinkedIn. You can also follow our views on our *new* website at newyorklifeinvestments.com and clicking “insights”. Until then, I’m Robert Serenbetz.
Lauren: And I’m Lauren Goodwin. We’re wishing you all a happy and healthy 2021.
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