The Backdrop for the Beginning of 2021
- Better Economic Data – Economic data, which lags the stock market, hit rock-bottom as we expected during April and May, but early signs of a recovery have begun to appear. Now that we have a fifth round of stimulus from Congress, especially with in the unemployment area, we believe that we will continue to see increased consumer spending and job stabilization – both keys to getting out of this pandemic-induced recession.
- Better than Anticipated Earnings – Given the record amount of stimulus, and that S&P 500 earnings are only 15% below its peak, we believe earnings growth will continue to be a determining factor of success for corporate America. Moving forward, we believe that if earnings growth in 2021 can surpass the multiple contraction that we could potentially see, since we are at 99th percentile multiple, positive future performance could occur.
- MOAR Stimulus – Another round of potential stimulus could create meaningful potential energy for economic growth as economies fully re-open. This will likely add to corporate EPS growth recovery.
- Faster-than-Expected Inflation – The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations.
- Rise in Corporate Taxes – Now that the Democrats control the Presidency and Congress, investors, individuals, and corporations should expect some type of increase in taxes in the future. Though, it is expected, and potentially priced into the market, that the Biden administration will focus on another round of stimulus before they turn their attention to taxes. We believe that a tax increase won’t be on the table until 2022, but if this happens faster-than-expected, we could potentially see a 9% headwind for corporate earnings.
- Slow Return of Service Jobs – If there is a slowdown on the job recovery front, it will take longer-than-expected to return to normalcy. Given the consumer capital on the sidelines right now, we believe it is imperative that Americans have a high propensity to spend. If business owners believe that it will take longer-than-expected for the economy to open, jobs will not come back, as expected. Business owners need to have faith in the future before they bring employees back on board.
- Breakout of Mutated COVID-19 Strand – A complete government shutdown is unlikely, but a targeted shutdown remains an option for state and local governments, as we continue to learn more about the COVID-19 mutated strand. Just look at what Boris Johnson did in the U.K. This could potentially shatter an already fragile economy in some areas of the United States.
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.
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