It is a tradition around this time of year to make predictions about what stock market holds for investors in the following 12 months. These predictions garner a lot of attention and many investors take the top stock picks by the pundits seriously, and when markets open, these names tend to see a lot of volume as a result. And yet, far more often than not, these predictions end up being wrong. 2020 has basically taught us that forecasts are pretty much a waste of time. Amid an unexpected virus and a global recession, no one could have guessed that the markets will end the year in record territory. Given this backdrop, it is hard to predict which trends will continue into 2021.
Future Wealth’s View
While sweeping forecasts draw the headlines, we, at Future Wealth, are more inclined to look near term – one to two quarters ahead. The two areas which, we believe, would provide some insight into market behavior are Federal Reserve and Federal government policies. Here is what we know – the Fed has pumped about $3 trillion directly into the financial system, mostly via its purchases of bonds, increasing its balance sheet assets to $7.24 trillion. It’s planning to continue to pump $120 billion into the bond market every month while keeping interest rates at zero well into 2023. The Federal government, for its part, is in favor of providing a lot more fiscal stimulus in addition to the $4 trillion it has pumped into the hands of US consumers and businesses already.
These two conditions that led to strong market performance in 2020, coupled with the proliferation of vaccine shots this year, give us the confidence that markets will continue to remain robust in 2021. Of course, there will be bumps along the way and the recurring theme that valuations are too high will cause the occasional drop. If history is any guide, the smart thing for the investor to do will be to step out and enjoy some fresh air, and avoid focussing on the performance of their portfolio every day.