Happy New Year! We are very glad that we were able to rely on our objective process to help navigate client accounts through the volatility and unpredictability of 2020 . For 2021, our process suggests another positive year for the stock market, though we will likely experience several pullbacks along the way. Three months ago we wrote that stocks should perform well in the 4th quarter with catalysts being a probable vaccine approval, favorable credit conditions, a synchronized global recovery, and investor cash on the sidelines in search of higher returns. The S&P 500 rallied 11.7% from October 1st to December 31st, according to Credit Suisse. Entering 2021, all of these factors are still in place. What has changed is investor sentiment; investors are far more optimistic today than they were three months ago. Paradoxically, this raises the risk of a near-term correction. When too many people expect a certain outcome, the market often does the opposite in the short term.
However, the threat of a pullback should not deter investors. As legendary fund manager Peter Lynch once wrote, “more money has been lost waiting for corrections than in corrections themselves”. Our focus on quality companies makes it easier to stay the course in difficult times. Furthermore, the backdrop for stocks – namely the synchronized global recovery and favorable credit conditions – is still extremely positive. Additionally, expect corporations to exceed earnings estimates as cost-cutting efforts and revenue growth outpace conservative analyst expectations.
Many clients find it difficult to hold, much less buy, when the stock market is near all-time highs. That is understandable on an emotional level. However, the data suggests this fear is unfounded. According to data from JP Morgan and Factset, since 1988 investors would have experienced better returns over the following 1, 3, and 5 years when investing in the S&P 500 at all-time highs as opposed to doing so at other times. In the stock market, strength begets strength.
For most of the past few years, our process has tilted client accounts towards the large US growth companies, particularly those in technology. Indeed, it has generally been the best performing area of the market. We still like these companies going forward. However, our process suggests that the market will broaden out in 2021. Many industries and asset classes that have lagged for the past few years are likely to perform well in a strong post-vaccine economy. As always, we will follow our process and endeavor to manage client accounts appropriately by making recommendations that are aligned with their long term financial goals and needs.