Most Wall Street pundits are predicting another good year in 2021. That consensus view, however, differs on what areas will do the best, and what won’t. Here is my take on the new year.
As a contrarian, it bothers me that so many investors are bullish. Too many sailors on one side of the rowboat tend to make the boat tip over. That said, I never simply do what others are not, unless there is a good reason to do so. Right now, I will go with the flow.
Over the last decade, large cap stocks, led by the technology sector, have outperformed almost everything in the stock market. Most strategists, including me, believe that while technology will continue to do well, it will not lead the markets higher. It will be, at best, a market performer. But there is nothing wrong with that.
Small cap stocks, on the other hand, will continue their outperformance of the last two months. After years and years in the doldrums, this area (as represented by the Russel 2000 Index), will finally have its day (or year) in the sun. If you had followed my advice, you would have already been invested in this area.
For those who didn’t, however, the timing on when to get in remains controversial.
“Wait for a pullback,” is the consensus advice right now, since most traders are expecting a hefty pullback sometime in the first quarter. Exactly when, and why, differs.
Some believe it could occur if the Democrats take the Senate because of the Georgia run-offs. Others think that a bigger sell-off might be in the offing around the time corporations announce their first quarter earnings results. The thinking is that the economic damage caused by this winter’s coronavirus surge has hurt the economy and will show up in the economic data around that time.
I have been in the markets long enough to understand that the stock market rarely needs a reason to correct. It just happens. Timing the decline is more a matter of luck, than skill. And while investors scramble to figure out why it happened, their portfolios are already down 10-15%. My advice is to simply expect a decline, and possibly use it to adjust to what I expect will be the new themes in 2021.
I will continue to favor U.S. small cap stocks, as well as commodities, industrials, financials, materials, and biotech/healthcare. My reasoning for this trade: the belief that the U.S. population will be vaccinated, although not as efficiently, nor as quickly, as the Trump Administration had promised. As a result, the re-opening of the economy will begin to unfold in the first half of 2021.
Commodities, an area I have focused on during the last six months, are also on the top of my list, specifically: silver, copper, oil, platinum, strategic metals, and gold (in that order). The expected surge in global economies and industrial production as a result of putting the pandemic behind us will see increased demand for all of the above commodities. You may ask why gold trails the pack? It is simple, gold is primarily a safety trade and an inflation hedge.
If I am right, there won’t be a need for this safety haven since the world economies will be reopening. And inflation will not show up until the second half of the year (if it does at all).
Emerging Markets and Southeast Asia, two areas I have been recommending for some time, should also continue their outperformance. I believe further declines in the greenback will continue. That trend will continue to help commodities and foreign investments.
In addition, I expect some investment “outliers” will be market winners. Marijuana stocks may benefit from a new attitude under the Biden Administration and a Democrat-controlled House, the return of crypto currencies could also be popular, and certain country funds (like Canada, Mexico, Australia, Indonesia, Thailand, and Turkey) that benefit from continued dollar declines could function as short dollar plays.
Overall, I could see the S&P 500 Index actually reach the 5,000 level at some point this year, if all goes as anticipated. If that sounds far-fetched, it is. A lot must happen for that to come true.
It assumes a vaccination program that achieves herd immunity by late summer, early fall. That’s a big “if” given the Trump Administration’s track record in dealing with the pandemic overall, and the distribution of these life-saving vaccines in particular.
But even more so, my forecast might be achieved if Americans come to their senses, put aside their differences, and once again act as a united nation. It assumes that we look forward to a better year for everyone on all sides. If you are up for that, next year’s gains are yours for the taking.