B. Riley Wealth Management Advisor Talking Points: Buckle Up For The First Quarter – A Few Predictions For 2021

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Market Commentary

Goodbye 2020!

Twenty years from now, how will historians write about 2020?

The Coronavirus Pandemic will dominate the way we look back on this year.  Not just as a 100-year plague that sickened the world and caused millions of deaths, but as an event that completely changed the trajectory of political, economic, and cultural trends for years to come.

Covid didn’t create trends; it just accelerated already existing trends.

Political Trends:  Without Covid, the presidential election outcome would most likely have been different.

Economic Trends: To fight Covid, for the first time in U.S. history, American politicians shut down the entire U.S. economy, forcing a brief major recession.  While the stock market and most of the underlying economy bounced back quickly, Covid hammered people at the lower end of the economic income scale.  It may take them years to recover.

Cultural Trends:  Covid also laid bare many of our U.S. cultural divisions that have been festering for years.  Americans found ourselves living in an era of poisonous political division on par with the 1790s, 1850s, late 1960s, and early 1970s when neither side was willing to acknowledge the other’s way of looking at the world was legitimate, and they considered the opposing views a fundamental threat to what each side held dear.

Racial Justice and Divisions:  In 2020, Americans witnessed one of the most horrifying acts of police brutality—the killing of George Floyd.  This led to an outpouring of protest and reflection by the entire country.  Whether any real reform will come of this incident remains to be seen.  The writer James Baldwin said, “it is sometimes easier to cry than to change.”

Healthcare Trends:  Covid will be remembered as having nearly destroyed our hospitals and national healthcare infrastructure.

Long-Term Economic Trends:  Working remotely with our zoom communications culture will have changed the long-term investment calculus for commercial real estate, business travel and hotels.

Advances in telehealth, remote work and virtual gatherings will outlast Covid.

Covid has also changed the investment calculus for both digital and brick-and-mortar retail stores.  In the future, brick-and-mortar stores will primarily sell uniquely local goods in boutique settings.  Most everything else will be bought through digital online stores and delivered to your home overnight or within a few hours for groceries and perishables.

Movie theaters will eventually go the way of pay phone booths as we stream new movies at home on ever larger widescreen TVs.

While remote education was put together in a slapdash manner during the lockdown, it became much better and effective as the year went on.  Make no mistake about it; remote digital learning will change all educational instruction forever.

The good news is restaurants and bars will eventually come back after the pandemic is over later next year.  The need to socialize and connect with others is so basic and primal to our nature as human beings that we will welcome back our local restaurants and watering holes with a renewed appreciation.

My Four Major Predictions For 2020 Revisited 

Prediction 1:  In January of 2020, before Covid, I predicted that the stock market’s S&P 500 Index would end the year up about 8%.  As I write this final commentary of 2020, Congress has just announced it will pass a new Covid Relief Bill of over $900 billion.  That should provide an end-of-the-year spike to the stock market.  As of today, the S&P 500 Index is up 16.24% year-to-date.

My +8% prediction was far too conservative.  I missed the actual percentage gain by over half.

Predictions 2 & 3:  After the lockdown stock market crash, I consistently predicted a V-shaped recovery in the stock market and a V-shaped recovery in the underlying economy.  After those ongoing predictions, I received a lot of skeptical feedback and suggestions that I was completely wrong. I’ll let you decide if these look like V-shaped recoveries.

The Year-To-Date S&P 500 Index:

The Year-To-Date ECRI Composite Index of Leading Economic Indicators:

 

Prediction 4:  On July 13, 2020, over a month before the Democratic National Convention, I predicted in my Market Commentary that it was likely that Joe Biden would win the presidency over President Trump.  At that time, very few analysts in the financial industry were predicting that President Trump would lose.

For an investment analyst, 3 out of 4 accurate annual predictions is not a bad track record—especially in a year with a once-in-a-hundred-year plague!

 

Where Do We Go From Here In 2021?

With the S&P 500 Index up 16.24% year-to-date, the stock market is currently overvalued compared to the overall U.S. economy’s underlying fundamentals.

GDP:  The expected U.S. Gross Domestic Product (GDP), which is all the goods and services produced in a year in the United States,  is expected to decline by -3.5% for 2020.  In 2021, as the vaccines eventually bring the country back to some semblance of “normal,” GDP is expected to grow by 4.4% if a new stimulus or infrastructure bill is passed in the first quarter.  With a combined average growth rate of less than 1% for 2020 and 2021, GDP will be basically flat for the two year period.  By some measures, the stock market should also be essentially flat over those two years if the stock market is a measure of the underlying U.S. economy’s direction.

Forward Price Earnings Ratio:  This is another way of measuring whether the stock market is over- or under-valued compared to the economy.  According to Factset, the forward 12-month Price Earnings Ratio (P/E) for the S&P 500 Index was 22.0 as of Friday.  That means the S&P 500 Index could be overvalued by more than 26% compared to the 5-year forward P/E average of 17.4.

One of the first things economists learn in college “Economics 101” courses is that the U.S. stock market always follows the directional trend of the underlying U.S. economy over the long term.  If the U.S. economy is growing and expanding, the U.S. stock market will go up in the long term.  If the U.S. economy is plateauing or going sideways, the U.S. stock market will go sideways in the long term.  And, if the U.S. economy is contracting and declining, the stock market, in the long term, will decline with it.

Right now, the underlying U.S. economy is slowing and going sideways, so the stock market is currently very overvalued compared to the underlying economy.

 

Buckle Up For The First Quarter of 2021!

The U.S. economy is slowing and could stall in early 2021. 

Investors should not be surprised to see at least a 10% or more pullback or correction from current prices in early 2021. This could be the start of a normal, healthy reversion to the stock market’s long-term trend of a forward P/E ratio of 17.4.

 

What Could Trigger A Large Stock Market Pullback In Early 2021?

According to CDC epidemiologists, the nation’s healthcare infrastructure is on the verge of being overwhelmed.  We are now seeing lockdowns in California, New York and other states.  As hospitals around the country are overwhelmed, we will see more lockdowns after the holidays.

We experienced a nationwide third spike of hospitalizations as a result of Halloween.  The CDC believes we are just entering into a fourth spike, due to Thanksgiving travel, that began around December 15.  They expect a significant Christmas/Hanukkah/New Year’s fifth spike to begin the second or third week of January 2021.

Sometime between now and January, we will likely see more major lockdowns of cities throughout the United States.

Epidemiologists believe that a full lockdown is inevitable if the nation’s healthcare infrastructure is at risk of collapsing.

Just as the March 2020 lockdown slammed the stock market, the stock market in 2021 will also react negatively to any new nationwide lockdown.

It is essential to understand that such a pullback will be an entirely normal and healthy correction because the stock market is currently so overvalued.

Investors have to understand that sometimes the markets get ahead of themselves, and they need to adjust. That will likely happen in the first quarter of 2021.

 

What To Expect From The Stock Market Next Year

This is not a time to panic or get out of the stock market.  In the long term, the stock market will thrive in 2021 due to the expected +4.4% GDP growth in 2021.  The new COVID-19 vaccines are expected to return the nation to some semblance of normal by the end of the year.

The CDC believes the strain on the healthcare infrastructure will start to abate in late February.

Also, the current $900 billion Covid Relief Bill combined with the expected $1 trillion in stimulus and $2-$3 trillion infrastructure bill after President-elect Biden’s inauguration should make 2021 an excellent year for the stock market after the end of the first quarter.

 

 

NOTE: This report is authorized for distribution to clients

Paul Dietrich, Chief Investment Strategist, B. Riley Wealth Management

Paul Dietrich is focused on managing investments for private investors, retirement funds, and private institutions throughout the United States. He also serves as a frequent on-air commentator. He regularly contributes market analysis to business and financial media, including CNBC, Fox Business, Bloomberg TV, CNN, The Wall Street Journal, Yahoo! Finance, Reuters, and The Washington Post.

 

IMPORTANT DISCLOSURES:

Information and opinions herein are for general use; are not unbiased/impartial; are current at the publication date, subject to change; may be from third parties, and may not be accurate or complete. Past performance is not indicative of future results. This is not a research report or solicitation or recommendation to buy/sell any securities. B. Riley Wealth Management is not engaged in rendering legal, accounting, or tax preparation services. Opinions are the Author’s and do not necessarily reflect those of B. Riley Wealth Management or its affiliates. Investment factors are not fully addressed herein. For important disclosure information, please visit  www.brileywealth.com/legal-disclosures.

 

 

 

 

 

 

 

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