A new Market Update to welcome the New Year. Forecasting the year ahead is always a difficult task. After the craziness we saw in 2020, who would try to predict what is in store for us in 2021? I am going to start off the year with some of my main questions I have for the new year.

1. COVID & the economic recovery: Undoubtedly the continued coronavirus crisis and the economic collateral damage are at the front of everyone’s minds. Almost all projections from Wall Street banks indicate it will not be until 2022 when the economy will recover. And even after 2022, the post COVID economy will surely be different than the pre-COVID economy. However, I feel that there is a tremendous amount of pent-up consumption coming. Families that weren’t devastated by the economic contraction have saved up during this crisis. Savings rates are at decades high levels and I believe that could lead to a future consumption boom.

2. Technology companies: Will shares of technology companies continue to outperform? Valuations have jumped dramatically for many technology companies. Household names like Amazon and Apple have experienced nice revenue growth but their valuations have seen a dramatic jump. I do believe there will be an eventually mean reversion here, but I am not here to call the top. The stock market was “expensive” back in 1998 and the bull continued to run for two more years before reality set it. Remember, even a household name like Cisco still hasn’t reclaimed its 2000 high of $77. The networking giant did, in fact, see the tremendous growth in their business that was predicted twenty years ago but it has taken Cisco almost twenty years to grow into their 2000 valuation.

3. Credit spreads: I don’t expect any surprises for Treasury yields; they will continue to be anchored to the floor for the next year or two. My question is around the current credit spread (the extra yield that borrowers must pay over Treasuries to compensate for that extra risk to the lender). Credit spreads have come in (gone down) in almost every area of credit markets: from high-quality companies to mortgage rates. Spreads are so “tight” that investors aren’t getting much extra yield to take additional risks. With the economic malaise still in store, what will happen to credit spreads?

4. Investor expectations: As the market has its cycle of ups and downs, investors emotions are along for the ride. In the cycle of investor emotions, feelings towards the markets are currently upbeat. I believe we are past excitement and on our way to the euphoria stage. But again, cycles aren’t perfect and timing is impossible. But when I recently had a contractor over to fix some wood damage, I got an earful about his Robinhood trading account after he found out what do for work. Not exactly the Peter Lynch’s cab drive sentiment indicator but it’s close.

These are the questions I have at the front my mind, the known unknowns. But what about things that aren’t thought of or even known about? Donald Rumsfeld’s “unknown unknowns.” Mr. Rumsfeld continued to say, “And if one looks throughout the history of our country and other free countries, it is the latter category (the unknown unknowns) that tends to be the difficult ones. COVID is definitely the unknown unknown of 2020. What is the thing we don’t know now that we will at the end of 2021?

With markets trading near highs and the momentum clearly on its side, we continue to be cautious towards opportunities. But if today’s decline continues, it could offer nice entries into some names on our shopping list.

Happy New Year!
/ben