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It’s been an interesting year. On the investing front, we saw a quick, short recession
bring the S&P 500 down over 30% in just 30 days. Fast forward a few months and,
despite worsening health conditions, equities were at all time highs.
Will the generous monetary and fiscal policy that facilitated this continue?
Are stocks too expensive now? Will inflation destroy real bond returns? Let’s see what the experts think.
Policy
Expect accomodative monetary and fiscal policy to continue through 2021.
Monetary and fiscal policy significantly softened the blow of the pandemic.
Although such policies have typically been followed by austerity, experts think that is highly
unlikely in 2021. Expect interest rates in the US and elsewhere to remain low, close to current
levels.
Stocks
Expect weaker returns for US stocks, particularly growth and large cap stocks.
Most experts believe stocks in the US are slightly overvalued.
Vanguard’s CAPE estimate shows the S&P 500 on the upper edge of their “fair-value range.”
In particular, many see large cap and growth stocks overheated. Opportunities may exist
in smaller cap and value stocks.
Ex-US stocks appear slightly undervalued according to many expert analyses.
Experts anticipate significantly higher returns for these stocks in the coming decade.
Bonds
Short-term interest rates probably won’t change much, expect sub 2% returns.
We started 2020 with very low interest rates, and COVID helped lower them further.
This monetary policy will likely continue throughout 2021, keeping interest rates near their current levels.
With rising inflation, it may be difficult for bonds to produce real returns.
However, bonds may continue to provide utility as portfolio diversifiers.
Gold and cryptocurrencies
Speculative assets are more difficult to forecast. We won’t even venture a guess at gold prices in 2021.
As stated below, most experts do not foresee inflation significantly above 2%, which may
turn some investors away from gold. Negative developments with the coronavirus or further
dollar weakening could counter such a trend.
Bitcoin forecasts, as usual, are highly scattered. Rightfully so in our opinion.
Slight changes in policy could direct massive sums of institution and hedge fund money into / out of cryptos.
It seems Bitcoin has turned a corner this year, attracting investment from more mainstream investors and organizations.
Based on this and historical price dynamics, we wouldn’t be surprised to see Bitcoin hit 50k USD by mid 2021
(and even higher later in the year).
Inflation
Expect about 2%.
COVID helped drop inflation to 1% in 2020.
The federal reserve shifted its policy in August to target 2% average inflation.
This means they will likely let inflation run above 2% for some time.
While we’ve heard fears of higher inflation, over 3%, most experts think this is highly unlikely, certainly in 2021.
GDP
Countries with higher COVID infection rates like the US and Europe probably won’t reach full employment
and will see limited growth, around 5%. China, on the other hand, has managed COVID and
already returned to pre-COVID economic growth.
Experts expect about 9% growth there. Other emerging markets will likely be in the 5 to 9% range.
Warning
All investing comes with risk. The projections above are based on expert opinions that are sometimes wrong.
Stock projections herein assume COVID vaccines and therapeutics will ease government
restrictions and consumer hesitancy throughout 2021.
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