Farewell to 2020 and Looking Ahead to 2021
Hello and Happy New Year!
As we look back on 2020, it goes without saying that this year has been like no other. The challenges faced were universal, but there were bright spots as well. As the markets were extremely volatile, we are proud of how we were able to navigate through this period, and we feel our experience helped us finish 2020 with strong results once again, despite the unusually chaotic year. As your fiduciary and Registered Investment Advisor (RIA), we take an enormous amount of pride in the confidence you have shown in us. From everyone at Nollenberger McCullough Investment Advisors, thank you for your trust!
Looking Back on the Last 12 Months
At this time last year, the markets were humming along very positively, and Wall Street analysts were busy publishing their 2020 forecasts and predictions. The best I can tell is, most Wall Street analysts did not notice the importance of the virus sweeping through Wuhan, China, the effects it would have, and the potential for a pandemic. Even the most experienced and historically accurate analysts seemed to have missed it. Given the pandemic was a 100-year event, or a "Black Swan event", something which is usually not foreseen, I believe the Wall Street analysts could be forgiven for missing this one.
But didn't we just have a monetary crisis in 2008-2009 which was also a 100-year event? The point is, things do go wrong occasionally and how we react to these events will determine our success in investing. Certainly, Black Swan events are exceedingly difficult to predict. This underlines why it is so important for investors to take risks commensurate with their overall comfort level, mindful of their ability to withstand volatility and to maintain liquidity for investment opportunities.
On a positive front, one of the things to come out of the COVID crisis and the 2008-2009 monetary crisis is that the Federal Reserve has learned how to adapt their monetary policies quickly and powerfully to a systemic event, thus creating liquidity in the financial system to prevent the situation from getting worse.
Our Economic Outlook for 2021
As of this writing, the U.S. is rolling out two vaccines for COVID as new cases are increasing rapidly all over the country. The current concerns are that holiday and family gatherings will create a major rise in new COVID cases and the administered vaccine must work and get to people quickly. The distribution and administering of these vaccines will still take months, and investors and their investment managers need to be prepared for the slowing of economic growth and increased market volatility in the first half of the year, while seizing upon the opportunities that distribution of the vaccine may present.
We are forecasting a strong year for 2021, and although we would not be surprised to see the equity markets pull back 10% or so in the first six months of the year, we expect a strong, positive second half, in which the markets should be up approximately 25% from the lows.
Our forecast is based on a number of factors including:
Vaccine implementation.
Earnings for Q4 of 2020 being released and companies giving "forward guidance" for the balance of 2021 and into 2022.
The new administration's policies, regulations and possible tax changes.
The outcome of the Georgia Senate race.
The Federal Reserve continuing its accommodative monetary policy as they said they would, at least through the end of 2021.
How We Look to Invest in 2021
Market volatility can be disconcerting, but it can also be a terrific opportunity to become invested. We look to take advantage of equity and fixed-income markets when prices are down or the market is volatile. In 2020 we made a number of profitable fixed-income and equity trades, and we are already taking advantage of opportunities that we believe will present themselves in 2021-2022.
2021 Assumptions
Monetary policy will continue to be accommodative.
Interest rates will remain low.
The dollar will decline further.
The economy will start improving around mid-year.
Consumers will increase spending.
The employment market will improve.
Tax changes, if they occur, will have a modest effect.
We look to take advantage of the market fluctuations and buy common stocks or corporate bonds on market declines. We are looking for well-managed companies with a strong balance sheet, which should benefit from a lower dollar and stronger consumer and corporate spending. We will buy companies which pay dividends and have a strong economic moat for our Blue-Chip strategies and companies that have robust growth characteristics for our Growth Strategy. An example of some companies we like are Boeing, Caterpillar, JP Morgan, and Amazon.
Interest Rate Outlook
Our view is that the Federal Reserve will keep interest rates close to zero, and it is likely that longer-term interest rates will rise as the economy improves. This widening of the yield curve is likely to happen in the back half of 2021. For now, our position is that a shorter bond duration is appropriate in an environment where longer-term interest rates should increase.
Our Stock Market Forecast
We believe stock market valuations are overall attractive, but we are recommending holding some cash going into the first six months of the year, as we expect there may be a 10% retracement sometime within this period. Our view on valuations is positive when combining the perspective of rising earnings and ongoing low-interest rates over the next 18 months. We continue to like equity valuations over the next three to five years.
We intend for this to be a high-level summary of our thoughts. For a more detailed view, a review of your portfolio or to discuss your specific situation, please give us a call at 415-287-5100.
We wish you and yours a very healthy and Happy New Year and a prosperous 2021!
Bye Bye 2020!!
Sincerely,
Bruce
Bruce Nollenberger
415-287-5100
Nollenberger McCullough Investment Advisors
Performance - Trust - Experience
Bruce Nollenberger
415-287-5100
Leon Wiatrak
415-956-8700
Nollenberger McCullough Investment Advisors
100 Shoreline Highway Bldg B, Suite 380
Mill Valley, CA. 94941
415-956-8700 or 415-287-5100
www.nollmac.com
Nollenberger McCullough Investment Advisory
Performance -Trust - Experience