2021 "Outlook"

Now is the time of year when we are bombarded with “outlooks” and “commentary” about what to expect in 2021. It’s natural of course, people are thirsty for guidance in an uncertain world, market outlooks in January are as common as resolutions and usually just as impactful.

In the interest of full disclosure here is what I said, word for word, in January of 2020:

“Growth still positive but slowing. New Home Sales/Employment Growth/Hotels/Vehicle sales all the significant growth is behind us.  

Employment is still solid and Household Debt Service is at a record low

Presidential election years since World War II have tended to see stocks struggle early, rally late (after election uncertainty subsides) and finish with an average gain of nearly 7%.”

How did my “outlook” do? Well, the S&P500 ended the year up a little more than 18% after undergoing a macro shock, social unrest, a Presidential election, and market volatility akin to that of the Great Depression. I correctly predicted the market would be up, but, if we use the history of the market, stocks are up more than they are down over any 1-year time frame. Saying “the market will be positive” is a higher probability guess than saying it will fall. 

When it comes to outlooks about the economy or the market, what I want you to focus on is not the guess about market direction or performance, but how that person thinks about the World. What is their framework and how adaptable are they to change? 

My framework for 2020 was that growth was slowing, but jobs and consumer balance sheets were still supportive of the market. Jobs got nuked in the pandemic, as did the market, but balance sheets were one of the bright spots due to the CARES Act and low rates. When the pandemic hit, I shifted gears to analyzing how the consumer was acting because that’s what the market would focus on.

Remember, you don’t need to know where the market or the economy is going to be a successful investor, that is not a prerequisite for making money. The absolute BEST investors are betting on the long run not the short run, they acknowledge that the World and the economy fall apart from time to time but that doesn’t preclude them from compounding their wealth. 

So how am I thinking about 2021 and beyond? Here is my framework:

• Continued bounce in employment and GDP growth from crisis low levels as we inch back towards normalcy.
• Housing remains a considerable tailwind as Millennials trickle into home ownership over the next decade spurred by population migration and low rates.
• Demographics are favorable right now, 80mm millennials are entering the prime of their lives.
• The vaccine will finally reach critical mass sometime around Q2 setting the economy up for potential supernova of growth, 5-8% annually over the next few years, as people absolutely FLOOD out of their homes. I don’t want to get delivery for the next few years and I’d be happy seeing every single Baird branch in person.
• The Fed is still easy and committed to such, do you realize how important that is?
• The potential is there for a “roaring 20s,” I just hope its “roaring” for everyone (and that prohibition doesn’t come back).

How do I think the market will do? Here is my framework:

• I’m finally smart enough to realize that this only a guess, there is no human being on the planet that knows the answer to this question. None, so stop looking for it.
• I think it’s possible the market has discounted a lot of economic growth and we may be asking ourselves “why isn’t the market up more given this surge in activity?”  

Dear reader, the kind of stuff that TRULY moves markets, the shocks that represent a real risk to your money, will never be seen in advance. If you are reading about a “worry” in the media, on a blog, or on TWTR, the market knows about it. If you are forwarding an email to your advisor saying “what about this” the market knows about it.

For as much as we talked about the “Trade War” with China how insignificant does that seem now? How about election worries, how did those go? I’d argue in the past 20 years there were only 3 events that posed an outsized risk to your money: 9/11, The GFC, and COVID19. How many of those were on the top of the markets mind when they happened? You get my point.

2021 will be another year on our journey full of ups and downs, success and failure, high points and low points, joy and sorrow. Will there be winners and losers this year? Yep. Will there be exciting sectors and names to invest in? Absolutely, and Baird advisors will help their clients do just that, but 2020 should’ve taught you that having a plan and sticking to it is the most important thing you can do.

Make this the year you commit yourself to being a long-term investor and as my friend Morgan Housel said, stop asking yourself the question “what happens next” and start asking yourself the question “how long can I stay invested for?”