2020 has been a tumultuous year, and as we near its close, we are pleased to present Outlook 2021: Powering Forward, which outlines our views on markets, the economy, and policy into 2021 and beyond.
Policy changes should be relatively benign, as we believe a split Congress is the most likely outcome, which should reduce the likelihood of more dramatic changes.
- A fifth COVID-19 relief bill may be passed, but recent headlines have suggested the bill will be smaller in scale.
- The Federal Reserve (Fed) is unlikely to reverse course on its accommodative policies.
- Inflation risks may be skewed to the upside, an important consideration for the Fed going forward.
Economic growth should reaccelerate in 2021. Rising COVID-19 cases present the opportunity for a soft spot to begin the year, but may prove transitory.
- We forecast 4–4.5% gross domestic product (GDP) growth in the United States and expect global gross domestic product (GDP) growth of 4.5–5%.
- A swoosh-shaped recovery, characterized by a quick, sharp decline and then a partial snapback followed by a gradual recovery is the most likely scenario, in our view.
- The rollout of a COVID-19 vaccine is needed to lift up the heavily impacted segments of the economy such as service industries.
- A soft US dollar environment may persist amid the backdrop of dovish central bank policy and continued budget and trade deficits.
Stocks should see modest gains in 2021, and a strong earnings rebound could allow stocks to grow into their current valuations.
- We see an S&P 500 Index fair value target range of 3,850–3,900 in 2021 with potential for further upside if the production of a vaccine exceeds expectations.
- Growth-style stocks may continue to perform well next year, but we expect participation to broaden, which could boost cyclical value stocks.
- Early-cycle positioning and prospects of a strong earnings rebound may provide a tailwind to small caps.
- We maintain our preference for emerging markets equities over developed international given the stronger growth prospects of the region.
Bonds will present a more nuanced challenge for investors as interest rates rise amid the backdrop of an economic recovery and normalizing inflation.
- Our target range for the 10-year Treasury yield is between 1.25% and 1.75%.
- With modest return expectations for high-quality bonds, we recommend suitable investors consider positioning for a rising-rate environment.
- We prefer an overweight to mortgage-backed securities and investment-grade corporates for suitable investors.
We believe 2021 could provide similar market performance as 2020—particularly if progress on a vaccine exceeds expectations—although we sincerely hope the path will be much smoother than what we experienced in 2020. Markets are forward-looking mechanisms, and as we receive further clarity on what the world may look like after the pandemic, we expect markets will reflect this.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and Bloomberg.
This Research material was prepared by LPL Financial, LLC.
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