During times of great volatility, instead of looking out one or two years, investors scrutinize the next 30 to 180 days into the future.
As recovery begins to happen, the market begins to look at the next 6, 12, 18 months, says Christopher Silipigno, chief operating officer and managing director with Renaissance Investment Group.
In the year to come, some market positives are that the creation of the vaccine is in the past, and that there are assurances that the federal government will continue to stimulate the economy, making for a good environment for risk assets such as stocks and bonds.
Other significant benchmarks for the coming year, Silipigno says, include:
The positives for 2021
The savings rate: The percentage of income that Americans are saving (and have saved) is significantly higher than normal ($1 trillion since March). With COVID-related restrictions, there’s significantly fewer things to spend money on. “They’re not going to Disneyland and on family vacations, they’re not going out to eat,” says Silipigno. “This will create a positive environment for the economy: a population vaccinated and ready to move about and with a great amount of savings. There’s real desire to engage in the service economy, and it will be met with a financial ability to act on it. Very favorable.”
“Inventories are very low, which is a good thing. Factories will need to produce goods to restock and supply pent-up demand. It means additional hirings and spending in the manufacturing sector.”
Low interest rates are also supportive of increased equity prices. “Stocks are worth more when rates are low, because growth and earnings are bolstered while simultaneously your alternative (bonds, savings accounts) isn’t as attractive,” says Silipigno.
The risks in 2021
The greatest risk in 2021, inflationary pressures cause the Federal Reserve to react before it said it would, and raise interest rates. “There’s so much growth right now tied to low rates, you could see a significant market correction overnight,” says Silipigno.
As the pandemic and consequent restrictions drag on, we’re going to see more public companies filing for bankruptcy, warns Silipigno. There’s more pain to come and investors need to be alert.
Significant, unforeseen challenges with the vaccine rollout or virus progression could certainly cause markets to pullback, says Silipigno.
In 2021, “performance in the market is going to be tied to specific choices in specific companies. Purchasing broad-market mutual funds that are weighted too heavily in tech that benefited from “stay at home” are not going to produce at previous levels,” says Silipigno. A company-by-company analysis, like Renaissance delivers, is essential, he adds. “You can’t set it and forget it.”