What can we expect from the stock market in 2021?
If there was ever a year that we were reminded of the difficulty of making stock market predictions, it was 2020. Yet, many clients continue to search for "expert" market outlooks in hopes of positioning their portfolio to outperform.
If there was ever a year that we were reminded of the difficulty of making stock market predictions, it was 2020. Yet, many clients continue to search for "expert" market outlooks in hopes of positioning their portfolio to outperform.
While it's tough to fault anyone for failing to predict that we would experience a global health pandemic that would send shock waves across markets, it goes to show that an investment approach based on discipline and diversification rather than prediction and timing is perhaps the better route to take.
While it's tough to fault anyone for failing to predict that we would experience a global health pandemic that would send shock waves across markets, it goes to show that an investment approach based on discipline and diversification rather than prediction and timing is perhaps the better route to take.
To exemplify the difficulty of making market forecasts, we can look in the rear-view mirror at several examples of 2020 market forecasts and see how they turned out. A well-known financial publication surveyed 10 Wall Street strategists to gather their outlook1, below are a few takeaways:
To exemplify the difficulty of making market forecasts, we can look in the rear-view mirror at several examples of 2020 market forecasts and see how they turned out. A well-known financial publication surveyed 10 Wall Street strategists to gather their outlook1, below are a few takeaways:
The consensus of the strategists was that the S&P 500 would rise 4.1% in 2020, a substantial difference from the 18.4% that the index returned, despite all the headwinds faced. Even the panel’s most bullish member undershot where the S&P 500 would end up, estimating the index would rise to 3500 by year end. The strategists predicted that the 10-Year Treasury would end the year yielding 1.89%, a number more than double the 0.919%2 that we saw on December 31st. The strategists also didn’t expect the Fed to lower the federal funds rate to the level where it sits today, a target of 0% – 0.25%. The lowest range any strategist put on the rate was 1.25% - 1.50%. From a sector standpoint, 8/10 strategists were overweight financials going into 2020; the financial sector ended up being one of four sectors that experienced loses in 2020. Only two of the strategists were overweight the technology sector which ended up being the best performing sector. On the contrary, only one member of the panel was underweight energy, the sector that saw the lowest returns for the year.
What happened once COVID-19 threw a wrench into many forecasts? The New York Times Jeff Sommer writes that many doubled down, “In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 wouldn’t rise at all for this calendar year: They said the market would fall about 11 percent.”
What happened once COVID-19 threw a wrench into many forecasts? The New York Times Jeff Sommer writes that many doubled down, “In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 wouldn’t rise at all for this calendar year: They said the market would fall about 11 percent.”
In a year that was characterized by sharp swings for stocks, those who paid attention to those market forecasts may have made regretful decisions. While the dramatic downturn was swift and steep, with the S&P 500 falling 33.79% from peak to trough, the recovery would be just as quick, as the index followed that up with its best 50-day period in history3 and returned 70.18% from March 24th through year end.4
In a year that was characterized by sharp swings for stocks, those who paid attention to those market forecasts may have made regretful decisions. While the dramatic downturn was swift and steep, with the S&P 500 falling 33.79% from peak to trough, the recovery would be just as quick, as the index followed that up with its best 50-day period in history3 and returned 70.18% from March 24th through year end.4
It would be biased to highlight the inaccurate forecasts for this bizarre year if the record in the past had been impressive, but that isn’t the case. Year in and year out, economists across the industry give their outlook for the upcoming year, and when we reflect back on these forecasts, they turn out to be about as accurate as a weatherman that calls for rain in the desert.
It would be biased to highlight the inaccurate forecasts for this bizarre year if the record in the past had been impressive, but that isn’t the case. Year in and year out, economists across the industry give their outlook for the upcoming year, and when we reflect back on these forecasts, they turn out to be about as accurate as a weatherman that calls for rain in the desert.
Success in the market doesn’t require making accurate predictions, it requires the ability to stay in the game. An investor who is able to stay disciplined with their investment plan that their advisor set out for them, will be better off than one who constantly makes decisions based on “expert” market forecasts.
Success in the market doesn’t require making accurate predictions, it requires the ability to stay in the game. An investor who is able to stay disciplined with their investment plan that their advisor set out for them, will be better off than one who constantly makes decisions based on “expert” market forecasts.
Question of the Week: Should I invest in gold?
We’re currently in the midst of a global health pandemic and economic recession, have an impending presidential election, and have seen many economists speculate on the devaluation of the U.S. dollar. With all of this uncertainty facing investors at one time, it's natural that this question is on investors’ minds. Some proponents will make the claim that gold deserves a significant weighting in investors' portfolios. Gold's often-cited portfolio benefits include a strong long-term return, a hedge against inflation, and a portfolio diversifier. However, the evidence raises doubt about gold as an essential component in a portfolio. In examining the long-term return of gold when considering its addition to your portfolio, it's important to recognize that gold's price appreciation has been limited to unpredictable, isolated episodes of high demand. In fact, if you disregard the 1971-1974 period where US investors were unable to own gold directly, its long-term performance drops substantially. From January 1970 – December 2019, gold returned 7.81% annually, however, when we look at the return figures starting in January 1975, which is when the government removed ownership restrictions and U.S citizens were free to directly own gold for the first time, the annualized return gets cut to 4.79%. Investors often think of gold as a hedge against inflation. As Exhibit 1 shows, however, gold has been about 15 times more volatile than inflation. Over the period from January 1970 – December 2019, the annualized compound return for gold was 7.81% with a volatility of 19.24%. For comparison, the annual inflation rate has been 3.91% with a volatility of 1.29%. Investors may also consider whether an asset allocation to gold should be included as a part of a diversified portfolio strategy. However, it is important for investors to keep in mind that gold’s historical return and market correlation characteristics alone may overstate its potential value as a portfolio asset. Professor’s Ken French and Eugene Fama argue that much of the stock of gold is in the form of jewelry and other goods that pay a "consumption dividend." This dividend increases the current price of gold and lowers its expected capital gain return. But an investor who holds gold as a portfolio asset only expects to get the expected capital gain, which does not suffice to compensate for the risk of the asset. Given that gold’s only source of return is price appreciation caused by shifting supply and demand, this makes gold a speculative asset. If you put gold in a vault and wait a few decades, it will not produce anything, and its value will reflect the current spot market price. In fact, holding physical bullion may incur negative cash flows due to storage, insurance, and other costs. In contrast, a stock reflects ownership in a business enterprise that seeks to generate profits and produce more wealth. Investors who put their capital to work in the economy expect a potential return from cash flows and appreciation. Famed investor Warren Buffet summarized gold’s speculative nature, non-productive quality, and high opportunity cost in Berkshire Hathaway’s 2011 annual report – while the metrics referenced may have changed, the story remains the same: “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” The decision to own gold is often motivated by an emotional response to current events, leading to abrupt shifts in allocation strategy and failure to achieve capital market rates of return there for the taking. Investors may be better off allowing gold to fulfill their material desires, rather than including it as a component in their portfolio.
Exhibit 1: Performance Statistics, January 1st, 1970 – December 31st, 2019
Past performance is not a guarantee of future results. In USD. Source of Gold Spot Price is Bloomberg. Source of US Consumer Price Index is Bureau of Labor Statistics. Source of MSCI World Index (net div.) is MSCI. MSCI data copyright MSCI 2019, all rights reserved.
Tuning Out the Noise
For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as affecting your financial well-being can evoke strong emotional responses from even the most experienced investors.
For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as affecting your financial well-being can evoke strong emotional responses from even the most experienced investors.
Headlines from the so-called lost decade–the 2000s, when the S&P 500 ended below where it began–can help illustrate several periods that may have led market participants to question their approach.
March 2000:
Nasdaq Stock Exchange Index Reaches an All‑Time High of 5048
April 2000:
In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
October 2002:
Nasdaq Hits a Bear-Market Low of 1114
September 2005:
Home Prices Post Record Gains
September 2008:
Lehman Files for Bankruptcy, Merrill Is SoldWhile these events are more than a decade behind us, they can still serve as an important reminder for investors. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. However, if one had hypothetically invested $10,000 in US stocks in January 2000 and stayed invested, that would be worth approximately $32,400 at the end of 2019.1
When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.
Headlines from the so-called lost decade–the 2000s, when the S&P 500 ended below where it began–can help illustrate several periods that may have led market participants to question their approach.
While these events are more than a decade behind us, they can still serve as an important reminder for investors. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. However, if one had hypothetically invested $10,000 in US stocks in January 2000 and stayed invested, that would be worth approximately $32,400 at the end of 2019.1
When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.
EXHIBIT 1
Hypothetical Growth of Wealth in the S&P 500 Index
January 1, 2000–December 31, 2019
EXHIBIT 1
Hypothetical Growth of Wealth in the S&P 500 Index
January 1, 2000–December 31, 2019
Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.
However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor, as Exhibit 2 shows.
Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.
Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.
However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor, as Exhibit 2 shows.
Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.
EXHIBIT 2
How Do You Primarily Measure the Value Received from Your Advisor?
Top Four Responses
Top Four Responses
1As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 invested on January 1, 2000, and tracking the S&P 500 Index, would have grown to $32,422 on December 31, 2019. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.
1As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 invested on January 1, 2000, and tracking the S&P 500 Index, would have grown to $32,422 on December 31, 2019. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.
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DISCLOSURESDimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this publication reflect our judgment at the date of publication and are subject to change.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this publication reflect our judgment at the date of publication and are subject to change.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.