Nuveen’s chief strategist expects the market to encounter some surprises this year and argues that last year’s stock market returns could have been “borrowed” from 2021.
“As we emerge out of the shortest but deepest economic recession in modern history sparked by the coronavirus pandemic, we enter 2021 with investor optimism running high,” said Bob Doll, chief equity strategist at Nuveen.
“The reopening of the economy combined with increasing consumer and business confidence should create a positive backdrop for equity markets in 2021, but the key question is how much of this good news has already been priced into the markets.”
As such, Doll’s first prediction for 2021 is that US real GDP increases at its fastest pace in 20 years.
“While there are still swaths of weakness in the economy (e.g., in the travel, leisure and entertainment sectors), many areas have benefited during the pandemic (such as parts of technology and healthcare),” he explained.
“We expect the economy to move into expansion mode by the third quarter (or maybe even by the second quarter).”
The consensus GDP growth forecast of 3.8 per cent for 2021 is in his view is therefore more likely to be more than 4 per cent.
The second prediction Doll made is that inflation approaches 2 per cent as the 10-year US Treasury yield reaches 1.5 per cent.
“A key factor in our view is the Fed’s change to target an average inflation level rather than an inflation peak,” Doll explained.
“We also think higher commodity prices, dollar weakness and sector moves within equities point to higher rates and inflation.”
The next prediction is that the US dollar sinks to a five-year low.
“The notable deterioration in the US balance of payments and net savings rate, coupled with our expectation that global growth will eventually rebound faster than US growth, causes us to believe that the dollar will break below this trading range in 2021 as the trade-weighted dollar index approaches 85,” the strategist said.
Indeed, after a significant rise in the dollar during the early parts of 2020, it has been weakening since.
Performance of major currencies vs US dollar over 1yr
Source: FE Analytics
The fourth prediction Doll made is that stocks hit a new high for the 12th year in a row, but fail to keep pace with strong earnings growth.
“The US stock market has hit a higher high every year since 2009 and we expect that will happen again in 2021,” he said.
However, he also thinks stocks will not keep pace with earnings growth of more than 20 per cent. “In other words, 2020’s stellar stock market recovery (up nearly 70 per cent from the March low) has probably “borrowed” some from 2021,” he said.
“Most observers (ourselves included) agree that stocks are not expensive relative to other assets (chiefly government bonds), but are expensive relative to historical absolute levels.”
The next prediction is that stocks outperform cash, but cash outperforms Treasury bonds for the first time since 2013.
The strategist said: “Stocks can be flat for the year and still outperform cash, since stocks currently yield more than cash investments.
“With coupon rates on Treasuries so low, it also wouldn’t take much of a rise in yields for cash to outperform Treasuries in 2021.”
The sixth prediction Doll made for 2021 is that value, small and non-US stocks (especially emerging markets) outperform growth, large-cap and US stocks.
“For many years, the place to be within equities has been US, large-cap and growth stocks,” he said.
Doll emphasised that he does not advocate selling US large-cap and growth but added that non-US, small-cap and value stocks “have come to life” and outperformed on a relative basis, which is a trend he expects will continue.
“This rotation won’t be a one-way street, but relative cheapness of non-US, small and value – coupled with expectations of economic and earnings improvements – should be solid catalysts for this to happen,” he said.
Performance of value v growth in the last quarter
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Source: FE Analytics
Another prediction Doll made for the year is that healthcare and financials outperform energy and utilities.
He said that healthcare offers “good earnings growth” and “reasonable valuations”, assuming political headwinds don’t develop. Whilst in his view, financials appear “very undervalued” and he expects loan growth to resume and help the sector.
He continued: “Energy (where demand seems weak and supply seems plentiful) and utilities (where a general cyclical earnings pick-up, along with modest inflation and interest rate upticks would hurt) look less attractive.”
The eighth prediction from the chief strategist is that the US federal debt rises to more than 100 per cent of GDP on its way to an all-time high.
He noted that the coronavirus pandemic resulted in a “massive explosion” in fiscal aid and stimulus that has taken the US federal budget deficit from 5 per cent of GDP to 15 per cent of GDP in one year.
“Debt exploded to 100 per cent of US GDP during World War II in the 1940s,” he recalled. “But it declined to less than 30 per cent in the 1970s, largely through a rapidly expanding post-war economy.
“We project debt will exceed 100 per cent of GDP again next year and rapidly head higher as spending increases and as interest rates rise.”
Another prediction Doll made for 2021 is that the US/China cold war continues, but the conversation becomes quieter and more multilateral.
“The US currently leads the world economically, technologically and militarily. But China aspires to supplant the US, taking action in all three areas,” he said.
“While their approaches differ, both Republicans and Democrats share a major concern regarding China’s ambitions.”
Doll believes president Biden’s first priorities will be to “attack the issue multilaterally” as opposed to Trump’s “unilateral approach”.
He expects US/China relations will continue to have a “significant impact” on capital markets in the years ahead.
His 10th and final prediction for 2021 is that president Biden’s government “achieves some compromise legislation”.
Doll finished : “Although this prediction and hope may be optimistic, we think some ‘at the margin’ compromise legislation may be passed.
“Senate majority leader Mitch McConnell and president-elect Biden spent decades together in the Senate and have a reasonably cordial relationship.
“We also take hope from the group of moderates from both parties that was responsible for restarting conversations regarding the year-end aid package.”