Is our desire to assess and “predict” the future a
reflection of what is known for thousands of years now as being “partakers of
the divine nature”? I started my weekend
reading on that subject by reviewing writings by Gregory of Nyssa, John Wesley,
and Karl Barth. The concept of restoring hope underlines these readings, and
the expectations for a better year ahead is at the forefront of human longings
and of analysts.
The sunset of 2020 reminds us that unexpected events, like a
pandemic, can alter the way we live as well as the way we invest. The triumph
of tech stocks, as well as of the names associated with the idea of working
from home, became fertilizers of redefining expectations for 2021. Furthermore,
the force of government and central banks’ intervention/spending not only
provided a cushion and a market put, but also enhanced perceptions of bailouts,
if not outright sustained spending.
Given that at least 3-5 vaccines will be in circulation
during the first quarter in 2021 along with a number of therapies, the average
growth for developed nations is expected to be between 3.5-5% while earnings
are expected to grow on average by about 35%. There are sectors/stocks which
are expected to far exceed that growth, such as industrials and consumer
discretionary, while there are sectors that are expected to behave mediocrely
and experience earnings growth well below the average, such as utilities, real
estate, and consumer staples. Sectors such as health care, information
technology, communication and, to a lesser extent, financials are expected to
grow their earnings close to the anticipated average. Given the accommodative
monetary stand of the major central banks around the world as well as the expected
fiscal boosts coming from governments, we could say that all macroeconomic
forces point to a decent, if not a good year for equities in 2021.
If the anticipation then is for a positive outlook for
equities, what could we say about bonds and corresponding yields, and is there
any foretaste for precious metals? The reality is that the former’s (bonds)
prospects would depend upon the direction of yields, and the outlook for the
latter on recovery’s pace and the strengthening or weakening of the dollar. If
the pace of the recovery and the expectations about it are progressing well,
then we expect yields (especially the yield on the 10-year Treasury) to stay
between 0.84 and 1.22%, which by itself should create some interest rate
differentials in favor of the dollar, while pressuring downwards bond prices.
The combination of the two, along with the upswing in corporate earnings,
should also pressure gold prices down.
If, however, the prospects of recovery, growth, and earnings
are downgraded due to factors unforeseen at this stage, then yields would drop
giving an upward boost to bond prices, the dollar, and probably to gold prices.
“Are there any factors out there that may be visible and turn the positive outlook
upside down?”, a skeptical investor/analyst may ask.
The reality is that we can see three potential threats that
could upset the trajectory of a decent/good year in 2021. The first of those
threats deals with the possibility of a market correction (north of 8% in the beginning)
that could escalate into something of a major correction in the tune of 14-18%.
The second threat deals with the possibility of higher-than-expected
inflationary pressures by the fourth quarter in 2021. The third scenario
involves a major geopolitical event that will upset the market’s appetite for
risk, reduce risk tolerance worldwide, and bring into the picture the need for
statecraft policies that we have not seen for some decades now.
Before we say a few words about each of these potential
scenarios that could unravel the positive market trajectory, we should state
that globally the level of debt (especially after record-setting bond issuance
over just a very short time period) will play a role in the market’s trajectory
not just in 2021, but in the year 2022 and beyond. A significant rise in
long-term yields would squeeze the finances of many countries, while the
deployment of all that cash generated via corporate bond issuance could also
have significant consequences for M&A activity, dividend-paying strategies,
as well as buying-back stock and debt tactics.
So as the era of innovation, EV (electric vehicles),
robotics, semiconductors, AI, and cloud computing is unfolding, we are just
wondering what might happen to EV stocks like Tesla when realization sinks that
it’s just a car company? What possibly could the effects be if investors realize
that they are not that comfortable investing in the 99th percentile
of valuations, even in the era of non-tangible assets? Are there blind spots
not just in the macroeconomy but also in expectations? How would stocks react
to the realization that bonds are overpriced? How about the cyclical rotation?
Could normalcy imply more scrutiny of valuations in the tech sector and could
such scrutiny backfire for all equities? We have the feeling that we are safely
sailing into 2021 where recovery of margin will uplift equities. We know it’s
Friday, but how far is Monday?
We have discussed before the differences between QEs in the 2009-’14
period and the QEs of 2020. The former’s main goal was to credit reserves in
the books of financial enterprises. Those reserves did not circulate and did
not convert into higher money supply. The difference in 2020 is that not only
the amount of cash circulated increased significantly, but also governments boosted
their deficit spending. If the combination of the two starts translating into
higher inflationary pressures by Q4 of 2021, the market might be in for an
unpleasant surprise.
Now, as for the third potential scenario that could derail
the projected upswing, we could contemplate that the neo-totalitarianism of
China and Russia may present “hard” (rather than “soft” like Covid-19) security
threats to the US and its allies. The resilience and solidarity of the world’s
democracies has been tested lately and the undercurrent revisionism along with
its resurgent authoritarianism may require the demonstration of the West’s
ability for a “hard” response in addition to smart power demonstrations. The
year 2021 may turn out then to be the year where concepts such as “safe for
diversity”, “co-existence for the sake of democratization”, and “rivalry
partnership” are understood as obsolete, because institutional underperformance
is now a semi-permanent feature, indicating the need for some new institutions and
the vitality of reforms that can bring value back to order-building.
In the second part of his book The Self and the Dramas of History, Reinhold Niebuhr considers two priceless components of Western culture and their attitudes toward the self. In the Hebraic component we learn of the vitality of freedom and history, and in the Hellenic component we comprehend the structures and patterns underlying the flow of drama and history and the interpretation of such interaction for the self as a mind seeking to partake into the divine conspiracy called liberty from knowing.
Assessing the Prospects of 2021: Part I
Author : John E. Charalambakis
Date : December 15, 2020
Is our desire to assess and “predict” the future a reflection of what is known for thousands of years now as being “partakers of the divine nature”? I started my weekend reading on that subject by reviewing writings by Gregory of Nyssa, John Wesley, and Karl Barth. The concept of restoring hope underlines these readings, and the expectations for a better year ahead is at the forefront of human longings and of analysts.
The sunset of 2020 reminds us that unexpected events, like a pandemic, can alter the way we live as well as the way we invest. The triumph of tech stocks, as well as of the names associated with the idea of working from home, became fertilizers of redefining expectations for 2021. Furthermore, the force of government and central banks’ intervention/spending not only provided a cushion and a market put, but also enhanced perceptions of bailouts, if not outright sustained spending.
Given that at least 3-5 vaccines will be in circulation during the first quarter in 2021 along with a number of therapies, the average growth for developed nations is expected to be between 3.5-5% while earnings are expected to grow on average by about 35%. There are sectors/stocks which are expected to far exceed that growth, such as industrials and consumer discretionary, while there are sectors that are expected to behave mediocrely and experience earnings growth well below the average, such as utilities, real estate, and consumer staples. Sectors such as health care, information technology, communication and, to a lesser extent, financials are expected to grow their earnings close to the anticipated average. Given the accommodative monetary stand of the major central banks around the world as well as the expected fiscal boosts coming from governments, we could say that all macroeconomic forces point to a decent, if not a good year for equities in 2021.
If the anticipation then is for a positive outlook for equities, what could we say about bonds and corresponding yields, and is there any foretaste for precious metals? The reality is that the former’s (bonds) prospects would depend upon the direction of yields, and the outlook for the latter on recovery’s pace and the strengthening or weakening of the dollar. If the pace of the recovery and the expectations about it are progressing well, then we expect yields (especially the yield on the 10-year Treasury) to stay between 0.84 and 1.22%, which by itself should create some interest rate differentials in favor of the dollar, while pressuring downwards bond prices. The combination of the two, along with the upswing in corporate earnings, should also pressure gold prices down.
If, however, the prospects of recovery, growth, and earnings are downgraded due to factors unforeseen at this stage, then yields would drop giving an upward boost to bond prices, the dollar, and probably to gold prices. “Are there any factors out there that may be visible and turn the positive outlook upside down?”, a skeptical investor/analyst may ask.
The reality is that we can see three potential threats that could upset the trajectory of a decent/good year in 2021. The first of those threats deals with the possibility of a market correction (north of 8% in the beginning) that could escalate into something of a major correction in the tune of 14-18%. The second threat deals with the possibility of higher-than-expected inflationary pressures by the fourth quarter in 2021. The third scenario involves a major geopolitical event that will upset the market’s appetite for risk, reduce risk tolerance worldwide, and bring into the picture the need for statecraft policies that we have not seen for some decades now.
Before we say a few words about each of these potential scenarios that could unravel the positive market trajectory, we should state that globally the level of debt (especially after record-setting bond issuance over just a very short time period) will play a role in the market’s trajectory not just in 2021, but in the year 2022 and beyond. A significant rise in long-term yields would squeeze the finances of many countries, while the deployment of all that cash generated via corporate bond issuance could also have significant consequences for M&A activity, dividend-paying strategies, as well as buying-back stock and debt tactics.
So as the era of innovation, EV (electric vehicles), robotics, semiconductors, AI, and cloud computing is unfolding, we are just wondering what might happen to EV stocks like Tesla when realization sinks that it’s just a car company? What possibly could the effects be if investors realize that they are not that comfortable investing in the 99th percentile of valuations, even in the era of non-tangible assets? Are there blind spots not just in the macroeconomy but also in expectations? How would stocks react to the realization that bonds are overpriced? How about the cyclical rotation? Could normalcy imply more scrutiny of valuations in the tech sector and could such scrutiny backfire for all equities? We have the feeling that we are safely sailing into 2021 where recovery of margin will uplift equities. We know it’s Friday, but how far is Monday?
We have discussed before the differences between QEs in the 2009-’14 period and the QEs of 2020. The former’s main goal was to credit reserves in the books of financial enterprises. Those reserves did not circulate and did not convert into higher money supply. The difference in 2020 is that not only the amount of cash circulated increased significantly, but also governments boosted their deficit spending. If the combination of the two starts translating into higher inflationary pressures by Q4 of 2021, the market might be in for an unpleasant surprise.
Now, as for the third potential scenario that could derail the projected upswing, we could contemplate that the neo-totalitarianism of China and Russia may present “hard” (rather than “soft” like Covid-19) security threats to the US and its allies. The resilience and solidarity of the world’s democracies has been tested lately and the undercurrent revisionism along with its resurgent authoritarianism may require the demonstration of the West’s ability for a “hard” response in addition to smart power demonstrations. The year 2021 may turn out then to be the year where concepts such as “safe for diversity”, “co-existence for the sake of democratization”, and “rivalry partnership” are understood as obsolete, because institutional underperformance is now a semi-permanent feature, indicating the need for some new institutions and the vitality of reforms that can bring value back to order-building.
In the second part of his book The Self and the Dramas of History, Reinhold Niebuhr considers two priceless components of Western culture and their attitudes toward the self. In the Hebraic component we learn of the vitality of freedom and history, and in the Hellenic component we comprehend the structures and patterns underlying the flow of drama and history and the interpretation of such interaction for the self as a mind seeking to partake into the divine conspiracy called liberty from knowing.