3 Market Trends for 2021 - Woodward Diversified Capital
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January 4, 2021
3 Market Trends for 2021
The stock market delivered a fairly wild ride in could see sustained leadership heading into the
2020, with a steep bear market arriving in new year. Cyclical value stocks – which are
record time followed by a strong and sustained closely tied to economic growth and currently
rally that caught many investors by surprise. In enjoy low relative valuations – have not seen the
my view, 2021 will represent the first full year type of rally that growth has delivered. This
of the new cycle, which almost always has dynamic could change in the new year, as it is
tactical and strategic implications for equity common to see leadership shift around early in a
investors. I have three insights and possible new cycle.
trends to watch in 2021.
Long-time readers of my columns also know the
Trend #1: Will Capital Keep Rotating from emphasis that Zacks Investment Management
Growth to Value? places on earnings, which could also benefit
value in 2021. Value stocks are likely to have an
From the March 2020 bottom of the bear easier time delivering big year-over-year
market, growth stocks were powered higher by earnings growth, considering the dismal
low interest rates and catalyzed economic trends comparisons from the previous year (2020). As
towards digitization, remote work, and many ‘growth-y’ tech stocks enjoyed strong
technology’s role in providing new growth earnings even during the 2020 recession, the bar
avenues. Companies across virtually all sectors is already set high for 2021 – setting up the
and industries rushed to establish digital possibility for lower-than-expected earnings
infrastructure, and the slow walk to “online growth.1
everything” turned meteoric. High growth tech
stocks led the way. Trend #2: More Frequent Pullbacks and
Classic -10% to -20% Correction
Leadership started to change in November,
however, with positive vaccine news and The stock market defied many expectations in
diminishing uncertainty with regards to the the second half of 2020. A sharp, “v-shaped”
election, value stocks took over, and I think we bounce off the bottom of a bear market is one
Zacks Investment Management
Mitch on the Markets – Weekly Client Commentary January 4, 2021
thing. But to finish the year with a sustained In Europe, the European Central Bank has
rally even as election uncertainty crested and the committed to more stimulus, and the bloc’s
pandemic accelerated into dangerous territory recovery is said to focus more on green
was a surprising outcome. I have written many infrastructure and digitization spending. In
times that the stock market looks ahead six or terms of going where the liquidity is, Europe
even twelve months, and I think the rally was will certainly be a place to look, in my view.
pricing-in a strong recovery in the second half Fading Brexit uncertainty should also provide a
of 2021. tailwind.
Even still, we saw the top five S&P 500 stocks Bottom Line for Investors
generate 127% of index’s return in the first nine
months of the year, signaling quite a bit of I think there is a lot to look forward to in 2021,
concentration. We also saw fairly wild investor and investors should position portfolios towards
enthusiasm for IPOs, and many signals that equities – but only as far as your risk tolerance
retail investors are pushing far out onto the risk and long-term objectives allow. It is also, of
curve (see cryptocurrency rally and surge in course, important to remain diversified.
online trading on platforms like Robinhood).
I do believe that investor optimism may be
Towards the end of the year, it felt as though the moving a bit too quickly, however, and the risk-
buzz around what stocks or cryptocurrencies to taking I’m seeing is likely to give way to more
buy was growing quickly, telling me that frequent volatility and likely a correction that
sentiment was starting to drift into being far too will feel like another bear market (sharp,
optimistic and ‘risk-on.’ In my view, that’s a sudden, scary). Staying patient, focused on the
clear signal that a sharp correction is coming long-term, and biased towards quality and
soon, and I also think pullbacks should be more earnings should serve investors well in the new
routine as the market clears out some of the year.
froth.
Trend #3: Go Global
The United States is poised for breakout
economic growth in the second half of 2021, in
my view, but many other countries are already
there. Australia, South Korea, New Zealand, and
China have all but squashed out the Covid-19
pandemic, and their respective economies are
firmly on the path back to sustained recovery.
China looks to be leading the way so far.
When it comes to China, however, it appears the
rivalry with the United States is here to stay.
Nowhere will the competition become fiercer
than in the realm of technology, as both
countries seek self-sufficiency in critical
industries of the future, like Artificial
Intelligence, semiconductors, and 5G. Investors
would be wise to look both ways when it comes
to investing in growth trends, as the two
economic superpowers chart their own courses.
Zacks Investment ManagementMitch on the Markets – Weekly Client Commentary January 4, 2021
ABOUT MITCH ZACKS
Mitch is the CEO & Senior Portfolio Manager
at Zacks Investment Management. Mitch has
been featured in various business media
including the Chicago Tribune and CNBC. He
wrote a weekly column for the Chicago Sun-
Times and has published two books on
quantitative investment strategies. He has a
B.A. in Economics from Yale University and
an M.B.A in Analytic Finance from the
University of Chicago.
1
Black Rock. December 17, 2020.
https://www.blackrock.com/us/individual/insights/ta
king-stock-quarterly-outlook
Zacks Investment Management• $35 billion to fund wind, solar, and other clean
energy projects; A federal moratorium on
IN FOCUS THIS WEEK evictions, extended by one month to January
31.1
• Provisions of the stimulus bill
Is Optimism Building Too Fast?
• Signs of too much optimism in the retail
brokerage market The stock market staged a strong rally off the
spring lows, with frequent stories of 100+%
December 30, 2020
• Headwinds against Big Tech are gains and more recent news about explosive
returns in cryptocurrency. From an investment
building in China
standpoint, the strength across many asset
classes has led to a surge in “FOMO,” or fear of
missing out on returns. Many investors are
The $900 Billion Stimulus Bill Becomes rushing into the markets, pushing sentiment
Law from pessimistic in the spring to optimistic
today. Investors borrowed a record $722.1
After much political posturing and several billion on margin through November 2020, a
weeks of negotiations, the next round of fiscal signal that risk-taking may be approaching a
stimulus was signed into law last week. Here are crescendo. Optimism and overt risk-taking
a few of the key stimulus provisions in the bill: combined have been ominous for markets, as
historically they have tended to result in
• $600 stimulus check for Americans with up to corrections, pullbacks, and bouts of volatility
$75,000 in adjusted gross income (2019 (see 2000 and 2008 for examples). We’re also
earnings), including $600 per child; seeing signs of too much optimism in the retail
brokerage market, with individual investors
• A revival of enhanced federal jobless benefits opening more than 10 million new brokerage
for 11 weeks, with up to an additional $300 per accounts in 2020 – a record. The Wall Street
week; Journal also reported that the online trading
platform Robinhood saw 500,000 new
• $82 billion for education funding, with about downloads in December, as well as upticks in
$54 billion going to K-12 schools and $23 volume on brokerages like TD Ameritrade and
billion going to colleges and universities; E*Trade. If history serves as any indication, we
might reasonably expect volatility in the not-
• $7 billion for expanding access to high-speed too-distant future.2
internet connections, about 50% of which will
be used to help low-income families pay Headwinds Against Big Tech are
monthly internet bills; Building in China, Too
• $285 billion set aside for additional Paycheck Alibaba was China's most valuable company
Protection Program (PPP) loans for small throughout most of 2020, and planned to finish
businesses; the year with a bang by rolling out its much-
anticipated Ant Financial IPO. Then Chinese
regulators stepped in. In a crushing blow to both
Zacks Investment ManagementMitch on the Markets – Weekly Client Commentary January 4, 2021 companies, China's top commerce regulator announced an investigation into Alibaba's business practices, alleging the company may be abusing its dominant market position for monopolistic purposes. A few days later, the Chinese central bank (the PBOC) issued a statement criticizing Ant Financial's business practices, ordering the company to focus on its less-lucrative digital-payments business. Alibaba owns one-third of Ant, and both were founded by Jack Ma. It is unclear whether China's actions against Alibaba and Ant were tied to the government's disapproval of Jack Ma's recent statements criticizing China's oversight of businesses. Retaliation seems a likely motive for the punitive measures against Alibaba, and Nomura research analysts note that China may also be using Alibaba's case to send a warning shot to other dominant technology companies acting anti-competitively. Much like in the U.S., regulatory headwinds are building against Big Tech.3 Zacks Investment Management
Mitch on the Markets – Weekly Client Commentary January 4, 2021 ZACKS INVESTMENT MANAGEMENT, INC. 1 New York Times. December 23, 2020. https://www.nytimes.com/live/2020/12/16/business/us- economy-coronavirus 2 Wall Street Journal. December 27, 2020. https://www.wsj.com/articles/investors-double-down-on- stocks-pushing-margin-debt-to-record-11609077600?mod=djem10point 3 Wall Street Journal. December 28, 2020. https://www.wsj.com/articles/alibaba-shares-tumble-again- after-chinese-regulators-tighten-screws-on-ant-group-11609155921?mod=djem10point DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation. Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein. It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses. Zacks Investment Management
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