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TRANSAMERICA 2021
MARKET OUTLOOK
Not insured by FDIC or any federal government agency. May lose value. Not a deposit of or
guaranteed by any bank, bank affiliate, or credit union.
ABOUT THE AUTHOR
Tom is the Chief Investment Officer of Transamerica
Asset Management, the mutual fund arm of
Transamerica. Tom has more than 30 years of
investment management experience and has managed
large mutual fund portfolios and separate accounts.
As a member of the senior management team,
Tom heads Transamerica’s thought leadership
efforts and provides perspectives to advisors, clients,
the media, and general public. He writes and publishes
Transamerica’s Market Outlook and other relevant
commentary. He also heads Transamerica’s mutual
fund sub-adviser selection and monitoring process,
as well as product management. Tom holds a
bachelor’s degree in political science from Tulane
University, and an MBA in finance from the Wharton
School at the University of Pennsylvania.
THOMAS R. WALD, CFA®
Chief Investment Officer,
Transamerica Asset Management, Inc.
2
WHERE WE STAND IN 2021
• As the second wave of COVID-19 inflicts exponentially rising damage throughout global
society, the markets strive to look to the other side of the virus as high-efficacy vaccines
have been developed. However, as widespread distribution of these treatments could still
take months, investors may need to brace for slowing rates of economic growth and market
volatility in the early part of 2021 before the recovery accelerates in the spring and summer
months, providing a favorable backdrop for investors as the year moves forward.
• The aftermath of the presidential and congressional elections has allayed pre-election
fears of a contested outcome. However, all eyes will be on Georgia in January for two runoff
elections determining majority control of the Senate and, therefore, a strong presumptive
impact on President-elect Joe Biden’s expected tax plan. History infers a market preference
for split-party control of the White House and Congress.
• While U.S. economic growth could be challenged in 1Q 2021 as COVID-19 cases continue to
rise, we look for the economy to accelerate meaningfully in 2H 2021 as vaccine accessibility
dovetails with an accommodative interest rate environment and eventual fiscal stimulus,
driving pent-up demand by consumers and businesses. This could result in annual gross
domestic product (GDP) growth of 4% in 2021 helping the economy return to pre-virus
levels of real aggregate GDP by year end.
• We believe there are strong long-term opportunities in U.S. stocks, however investors
may need to incur some downside risks during the first few months of 2021 before the
vaccines reach widespread distribution. Thereafter catalysts include economic and earnings
recoveries, a lower-for-longer interest rate environment, and additional liquidity-based
monetary stimulus from the Federal Reserve. Our year-end price target on the S&P 500®
is 4,200 and we believe value stocks could finally be setting up for a meaningful catch-up
period versus growth stocks as the year moves forward.
• Short-term interest rates should remain in a lower-for-longer environment as the Federal
Reserve maintains the Fed Funds rate at a lower bound of zero for the foreseeable future.
The Fed is also likely to continue large-scale, open-market asset purchases at or near current
levels, providing further tailwinds for the broader markets. We see a range for the 10-year
Treasury rate of 0.75%–1.35% trending toward the upper end as the yield curve steepens
throughout the year.
• Credit fundamentals in the bond markets are likely to continue improving, however current
credit spreads appear to reflect that. Therefore, we believe high-yield and investment-grade
bond investors should expect coupon-type total returns in the year ahead. Excess returns can
still potentially be achieved through active managers capable of identifying opportunities not
found in passive bond indexes.
• We believe there could be attractive opportunities for long-term international equity
investors given the expected global economic recovery in 2021. Investors need to recognize
many uncertainties will affect the timing and magnitude of this recovery as numerous regions
and countries battle the second wave of COVID-19. Those who stay the course with
developed and emerging markets in the year ahead could be well rewarded.
3
THE STORM BEFORE THE CALM
Markets are the great discounter of future events, so much so they often look past what stands
directly before them in determining the longer-term horizon. As dark clouds of exponentially
rising COVID-19 cases continue to gather, and with it the economic impacts that could ensue in
upcoming months, the same markets that identified the low point of recession and contraction
last spring will likely be looking ahead to the calm after the storm.
COVID-19’s second act is creating a brutal trail of casualties far worse than its first. Daily case
numbers now immensely exceed what many had hoped would have been the worst back in
April. While the fatality rate in percentage terms has thankfully fallen, the absolute numbers
are now at staggeringly tragic levels, as in more than half the amount of all U.S. lives lost in
both world wars.
The metaphoric war on COVID-19 has had no shortage of heroes, just like the literal wars of
our past. Frontline medical and healthcare workers have held the line against the advancing
enemy much like the Union Army at Gettysburg, and the best minds of science have stormed
the beaches of vaccine development and clinical trials comparable to the Allied forces on
D-Day. As a result, there is now a path to victory, but just as those previous wars saw great
challenges in their final months so will this one. We can now see the clear, but to do so we
must look beyond an upcoming onslaught of wind, rain, hail, sleet, and snow.
As for the markets, their role in all of this is a relatively easy one. Keep looking out six months
to a year as they usually do. There will undoubtedly be some rough patches along the way as
the economy adjusts to a new round of sheltering and shutdowns, which will almost certainly
lead to some degree of downside volatility at various points in the months ahead. As matters
stand now, it’s quite likely such occurrences will represent opportunities for investors.
As we said at the outset of the pandemic, COVID-19 was a medical crisis requiring a medical
solution and pretty much everything else — monetary and fiscal stimulus, lower interest rates,
and new technologies to help business carry on — was a bridge. With high-efficacy vaccines
becoming ready for distribution, we are now perhaps only months away from being on the
other side of the bridge and the markets’ ability to see that is something history has proven to
be a strong case for investors. With that said, we now bid a long-awaited goodbye to the year
of 2020 and an optimistic welcome to 2021.
The aftermath of the presidential and congressional elections has
allayed pre-election fears of a contested outcome. However, all eyes
will be on Georgia in January for two runoff elections determining
majority control of the Senate and, therefore, a strong presumptive
impact on President-elect Biden’s expected tax plan. History infers
a market preference for split-party control of the White House
and Congress.
America has just concluded arguably its most contentious election in history and as the final
results stand on the edge of the history books, the markets appear cautiously optimistic that
a path has been cleared with limited collateral damage. Following more than a year of political
warfare between the two parties that, at times, resembled a professional wrestling cage match,
the message from the markets since November 3 has been one of optimism and welcome to
a balanced government not straying too far to the right or left. History also tends to support
reason for such optimism.
4
WORST FEARS NOT REALIZED
The markets have reacted favorably to the results of the election encompassing both the presidential and
congressional outcomes, though the latter is still in question as majority control of the Senate will not be fully
decided until two runoff elections are completed the first week of January. However, for the most part, the
two predominant market fears of the election, which had created some degree of investor angst in the months
preceding November, appear not to have come to fruition.
The first fear dealt with the prospect of a fiercely contested election perhaps casting a cloud of uncertainty
lasting weeks or months like the George W. Bush-Al Gore controversial recount of 2000, which was not resolved
until mid-December. History buffs among us might also cite the Rutherford B. Hayes-Samuel Tilden “brokered
election” of 1876, which was not determined until the last week in February of the following year (back then,
presidential inaugurations took place in March). In both of those cases, the markets declined during the post-
election uncertainties, however other market dynamics were clearly going on in parallel.
Despite the fact President Trump has formally contested the results in several close battleground states,
his legal efforts have not been successful in the courts, and the Electoral College has formally cast its votes
confirming former Vice President Biden as the president-elect. Market reaction for the most part seemed to
immediately confirm the end of contested election fears as the S&P 500 appreciated more than 4% and high-
yield credit spreads (ICE BofA US High Yield Index Option-Adjusted Spread) fell about 0.60% between election
day on Tuesday, November 3, and Friday, November 6. (The following Monday saw the release of initial vaccine
data, so it is difficult to estimate election-based market optimism after that day).
Post-Election Market Reaction: Stocks Rally Credit Spreads Tighten
November 2–November 5, 2020
3600 5.10
5.01
3550 5.00
3510.45
3500 4.90
3450 4.80
3400 4.70
3350 4.60
3310.24
3300 4.50
3250 4.40
4.36
3200 4.30
11/2 11/3 11/4 11/5
S&P 500 U.S. Corporate High Yield Credit Spreads
Source: Bloomberg
The second fear stemmed from potential market volatility driven by a “blue wave” election scenario in which not
only former Vice President Biden won the White House, but Democrats also gained a significant number of seats
within the House of Representatives and achieved a net gain of three seats or more in the Senate, re-gaining
majority control of that chamber. The market rally on November 4 was also being attributed to the Republicans’
apparent successful defense of the Senate and net gain of House seats, providing for a more balanced government
between the two parties, which has in recent history coincided with strong market returns. However, shortly
thereafter, we learned such balance was once again back in question.
5
Market concerns of a clean sweep by the Democrats also extended beyond just the notion
of a non-balanced government being historically less favorable to markets, as tax policy
expressed by the Biden campaign was believed in many corners to have also created investor
jitters. Specifically, the pending Biden tax plan, of which the new president would almost
certainly need a Democrat majority-controlled Senate to pass into law, has been expressed to
include rescinding the Trump tax cuts of 2017 and implementing an estimated $3.3 trillion in
additional tax increases over the next decade (Tax Foundation Equilibrium Model estimate,
October 22, 2020).
These potential tax increases would include:
• Raising the marginal corporate tax rate from 21% to 28%
• Increasing personal tax rates on top bracket earners from 37% to 39.6%
• Raising capital gains and dividend income taxes from a maximum of 20% to individual
personal rates at certain thresholds
• Increasing inheritance taxes by eliminating capital gains step-up provisions
• Imposing an additional 12.4% Social Security payroll tax on individuals earning above
$400,000 to be split evenly with their employers
There is likely enough in this pending plan, if passed and signed into law, to potentially create
some level of adverse reaction in the markets.
ALL EYES ON GEORGIA IN JANUARY
As if the past year had not brought us enough unexpected twists and pending uncertainties,
along comes the two Senate races in the state of Georgia, which through a bizarre chain of
events will now proceed to runoff elections on January 5 with majority control of the Senate
hanging in the balance. This situation is perhaps only fitting to have been created in the equally
bizarre year of 2020.
To fully appreciate this strange predicament, one might first want to recognize the rotation
of Senate seat elections are divided up roughly by one-third every two years so no one state
is scheduled to have both seats up for election in the same year. However, due to Georgia’s
incumbent Republican Senator John Isakson’s decision to retire in 2019 for health reasons,
a new Republican Senator, Kelly Loeffler, was appointed by the governor. However, appointed
Senators are not granted incumbency for the entire remainder of their predecessor’s term, only
until the next election year, meaning Senator Loeffler was up for immediate reelection in 2020
rather than at the end of Isakson’s term in 2022. This off-cycle Senate election then dovetailed
with Georgia’s other Senate seat held by Republican David Perdue, originally on the docket for
2020. This type of scenario has occurred before in other states, but it is not common.
Post Election: Runoff Contests
Will Determine Senate Majority
Republicans 50
Democrats 48
Undecided 2
Source: The Wall Street Journal
Republican Democrat Undecided
6
Source: The Wall Street Journal
Furthermore, Georgia is different than most states in that its senatorial elections require
a majority of votes to determine winners rather than a plurality. In a field of more than two
candidates, which both Georgia elections consisted of, no candidate reached 50%, which then
requires a separate runoff election between the top two candidates. On January 5, Republican
incumbents David Perdue and Kelly Loeffler once again face Democrat challengers Jon Ossoff
and Raphael Warnock for Georgia’s two Senate seats, and this time around with just two
candidates in each race, an official winner will be determined.
Now to further put all of this into a situation most Hollywood producers would not believe in
a movie script, it just so happens that the final tally on the Senate election concluded with
a 50-48 edge in the Republicans’ favor. If either Perdue or Loeffler emerges victorious on
January 5, the Republican majority is secured for the next two years. However, if both Ossoff
and Warnock win, the Senate will be tied at 50-50, allowing Vice President-elect Kamala
Harris to cast any tie breaking votes, therefore providing the Democrats with a practical
majority. A lot is on the line in the Peach State the first week of January.
SENATE MAJORITY CONTROL COULD HAVE MARKET IMPACTS
At the current time, we believe the markets are expecting the Republicans to hold onto
at least one of the two seats January 5 and maintain control of the Senate, though recent
polls are showing extremely close races in both contests. Should challengers Ossoff
and Warnock prevail, the shift to a Democrat-controlled Senate could force the markets
to reconcile and interpret two important potential developments far less likely under a
Republican-controlled Senate.
These would be:
• Longer-term market prospects of a non-balanced government
• Potential passage of the Biden tax plan
HISTORY INFERS MARKET PREFERENCE FOR SPLIT-PARTY CONTROL
OF THE WHITE HOUSE AND CONGRESS
While it is next to impossible to decipher precisely why and for what specific reasons markets
might go up or down over any four- or eight-year timeframe, it is probably fair to say that all
else being equal, markets prefer a balance between the two parties regarding the president
and Congress. From a practical standpoint, there is the argument investors feel more
comfortable during political gridlock when the government has less ability to change existing
market dynamics. From a more empirical point of view, over the past 40 years markets have
posted strong returns during presidential terms of divided power between the two parties.
Three quick examples:
In 1980, Ronald Reagan, the former Republican governor of California, was elected president
in a landslide and with it the Republicans gained control of the Senate, although Democrats
maintained a healthy majority in the House of Representatives. In 1982, the Democrats
regained control of the Senate and held it with the House for the remainder of President
Reagan’s two terms ending in January of 1989. The compounded annualized total return
of the S&P 500 during those eight years of balanced power between the president and
Congress rounded to 16%.
7
History Infers Market Preference for Split-Party Government
S&P 500 Returns
Reagan (Republican) Clinton (Democrat) Obama (Democrat)
Democratic House Republican House Republican House
Democratic Senate Republican Senate Republican Senate
January 1981 January 1995
to to
January 1989 January 2001
Annualized Return: Annualized Return:
15.8% 21.5%
January 2011
to
January 2017
Annualized Return:
12.4%
‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17
Balanced Government S&P 500 Total Return
Source: Bloomberg,
Source: Bloomberg, Transamerica
Transamerica Asset Management , Inc.
Asset Management
All indexes are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.
In 1992, Bill Clinton, Democrat governor from Arkansas, was elected president and
Democrats regained control of the Senate along with their existing majority in the House.
In 1994, Republicans won back control of the House and Senate and proceeded to hold them
throughout President Clinton’s two terms ending in January of 2001. During those final six years
in which there was split-party control of the White House and Congress, the S&P 500 posted
annualized total returns of better than 21%.
In 2008, Democrat Senator Barack Obama from Illinois was elected president, and, in that year,
Democrats also maintained majorities in the House and Senate. However, in 2010, Republicans
took back control of the House and in 2014 regained the majority in the Senate. The S&P 500
for President Obama’s six years of split control between the White House and Congress posted
annualized total returns of better than 12%. Similar returns during these presidential terms were
also seen in the Dow Jones Industrial Average.
History Infers Market Preference for Split-Party Government
Dow Jones Industrial Average Returns
Reagan (Republican) Clinton (Democrat) Obama (Democrat)
Democratic House Republican House Republican House
Democratic Senate Republican Senate Republican Senate
January 1981 January 1995
to to
January 1989 January 2001
Annualized Return: Annualized Return:
17.2% 21.2%
January 2011
to
January 2017
Annualized Return:
11.7%
‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17
Balanced Government DJIA Total Return
Source: Bloomberg,
Source: Bloomberg, Transamerica
Transamerica Asset Management , Inc.
Asset Management
All indexes are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.
8
Obviously there were countless other factors impacting the markets during these three
presidential tenures and it would be unfair and foolish to attribute all or most of the market
returns to the simple political party compositions of the White House and Congress in those
years. However, while the causation of balanced governments and market returns may be
an arguable premise (perhaps most heavily argued by those politicians seeking control),
the correlations remain quite clear historically and, we believe, provide at least some degree
of validity. For this reason alone, it is probable the markets would react less favorably to
double Democrat runoff victories in Georgia on January 5. (This is a market observation
and not a political opinion).
RUNOFF ELECTIONS COULD ALSO DETERMINE FUTURE
OF BIDEN TAX PLAN
Likely also of great interest to the markets will be the expected probability of President-elect
Biden’s anticipated tax plan being presented to the Senate perhaps in 1H 2021 or 2H 2022. As
described earlier, this plan is likely to hold many components, ranging from higher corporate
tax rates certain to impact public company earnings statements, to higher individual and
capital gains rates at larger income thresholds, as well as Social Security payroll increases and
higher inheritance tax implications. Most estimates of increased total tax payments range
from about $2–$3.5 trillion over the next decade. President-elect Biden has steadfastly argued
none of these tax hikes will impact individuals earning less than $400,000 annually, however
many disagree with that statement based on definitions of both tax and impact.
All else being equal, the markets probably will not like these higher taxes regardless of who
pays them. Higher corporate tax rates will negatively impact public company earnings and, by
definition, either the prices or the price-earnings ratios on stocks themselves. Arguments may
be made that higher personal, payroll, capital gains, and inheritance taxes will serve a greater
purpose and thus not be market unfriendly, but there are far fewer arguments they will be
market friendly in and of themselves. Finally, there is perhaps the greater overall market
fear that if the economy slips back into recession, for whatever reason, higher taxes, again
regardless of where they come from, could be a scary proposition when combined with
negative economic growth. For these reasons, the markets would likely prefer the Republicans
maintain Senate control in January, making a transformative change in the federal tax code
less probable.
It may also be worth mentioning that even with a double victory in the January Georgia
runoffs, Democrats would still only be left with a technical majority as the 50-50 tie would
leave absolutely zero room for error on a tax plan or any other legislation. Therefore, the
markets still might find some comfort in knowing one dissent among a group of 50 could
cancel out a Democrat majority at any given time.
9
All considered, the aftermath of the election likely leaves the market better positioned than where most had feared
beforehand. Many had feared violence and social unrest following the results. That did not happen. Many had feared
a long and drawn out post-election contesting of the outcome. That has not happened. Some investors feared a
disproportionate amount of control shifting to one political party versus the other. The jury is still out on this one,
but odds seem to favor that probably will not happen in the magnitude to which most were concerned.
So, politics aside, if that’s possible these days, the aftermath of the 2020 elections appear to have left the markets
with less to worry about than before, though investors should stay tuned for January 5.
WHERE WE STAND: ELECTION AFTERMATH
• All eyes will be on Georgia on January 5 when a double runoff senatorial election will ultimately determine which
party holds majority control of the Senate for the next two years.
• Majority Senate control will play a major and likely decisive role in the potential passage of the expected Biden
tax plan, anticipated to add approximately $3 trillion of additional taxes to individuals and corporations over
the next decade.
• With a Democrat majority in the Senate such tax legislation could be presented to Congress in 2H 2021
or 1H 2022.
• Recent history over the past 40 years infers that all else being equal, stocks strongly prefer a balanced
government with split-party power between the president and Congress.
10U.S. ECONOMY
While U.S. economic growth could be challenged in 1Q 2021 as
COVID-19 cases continue to rise, we look for the economy to
accelerate meaningfully in 2H 2021 as vaccine accessibility
dovetails with an accommodative interest rate environment and
eventual fiscal stimulus, driving pent-up demand by consumers
and businesses. This could result in annual GDP growth of 4%
in 2021, helping the economy return to pre-virus levels of real
aggregate GDP by year end.
There has probably never been a more important time for investors to differentiate between
the short-term and long-term prospects of the economy. Looking out over the next few months,
there are real challenges threatening the pace of the recent record recovery since last March,
and with COVID-19 cases surging and new rounds of business shutdowns, GDP growth for both
4Q 2020 and 1Q 2021 could ultimately prove to be anemic to negative. However, the months
thereafter hold great promise, particularly in light of the immense pent-up demand that could be
unleashed in 2H 2021 after widespread distribution of the vaccines and the expected mitigation
of business restrictions, shutdowns, sheltering, and social distancing.
It is also important to recognize that upon the consummation of the post-COVID world, albeit
incremental in nature, the economy will still likely have trillions of dollars of fiscal and monetary
stimulus at its sails, as well as low interest rates for about as far as the eye can see. Taking all
of this into consideration, we could be looking at one of the better economic setups in modern
history, though there may be some pain in the interim. Patience and toughness could be a
couple of traits in demand between now and baseball season — as in a baseball season with
fans in the stands.
11THE ECONOMIC ROLLER COASTER ROLLS ON
Forget about the markets for a minute or two. COVID-19 has created pure economic volatility
unlike anything witnessed by anyone living today.
This was of course seen in the unprecedented variance between 2Q and 3Q GDP growth
rates. Following what history has dubbed the Great Lockdown and 2Q cataclysmic shock
of -31% annualized negative growth, the worst individual quarter of economic contraction
since the Great Depression, the economy came roaring back in 3Q 2020 with a +33%
annualized print, the best in history, as virus case numbers fell and the economy re-opened.
Aside from the record economic volatility within those six months, the dramatic turnaround
in those summer and early autumn months helped create a renewed sense of optimism
among consumers and investors.
Economic Roller Coaster
GDP Growth 4Q 2019–3Q 2020
33.1%
2.4%
-5.0%
-31.4%
4Q19 1Q20 2Q20 3Q20
Source: Bloomberg
Source: Bloomberg, Bureau of Economic Analysis
Perhaps what investors felt most comforted by after the tremendous 3Q recovery was that
the expected return to pre-virus aggregate GDP levels had been moved up considerably.
Following the 2Q debacle, consensus forecasts had been for the U.S. not to return to its 2019
aggregate GDP equivalent until the end of 2022 or into 2023. Following the blowout 3Q GDP
performance, that timetable was moved up by most pundits to the end of 2021, and this was
clearly viewed favorably by the markets.
RISING COVID-19 CASE NUMBERS CREATE MORE UNCERTAINTY
The rate of increasing virus cases since the summer months has increased exponentially and
has now reached more than five times the worst daily rates of last April. While there is great
debate as to what precisely has caused this devastating and deadly second wave, be it the
colder weather or a lack of safety measures, the fact is the economy will not be able to sustain
its recent pace of growth under these types of case trends. Throughout the nation, state- and
local government-imposed business restrictions, school closures, and other related shutdowns
have begun in recent weeks and likely will continue over the following months. This will
pressure 4Q 2020 and 1Q 2021 economic growth.
12Second Wave of COVID-19 Cases Surge in 2H 2020
16,000,000
13,750,608
14,000,000
12,000,000
10,000,000
8,107,270
8,000,000
6,000,000
4,000,000
2,000,000
273,077
0
May 20
Jun 20
Jul 20
Aug 20
Sep 20
Oct 20
Nov 20
Total U.S. Cases Fatalities Recoveries
Source: Worldometers.info
Source: Worldometers.info
U.S. COVID-19 Fatalities and Recoveries
70%
59.0%
60%
50%
40%
30%
20%
10%
2.0%
0%
1 Mar
15 Mar
29 Mar
12 Apr
26 Apr
10 May
24 May
7 Jun
21 Jun
5 Jul
19 Jul
2 Aug
16 Aug
30 Aug
Sep 13
Sep 27
11 Oct
25 Oct
8 Nov
22 Nov
Recoveries / Total Cases Fatalities / Total Cases
Source: Worldometers.info
Source: Worldometers.info
13THE IMMOVABLE VIRUS MEETS THE IRRESISTIBLE VACCINE
Physicists and songwriters have long agreed that when an irresistible force meets an
immovable object, something’s got to give. Nothing personifies this premise more than
current COVID-19 virus trends and recently released COVID-19 vaccine data.
As we have said repeatedly over the past several months, we viewed the development of a
successful COVID-19 vaccine as the biggest wild card for the markets and global society.
Now with two vaccines developed by drug and biotech companies Pfizer and Moderna
showing efficacy rates of about 95% each in double-blinded placebo-based Phase Three
clinical trials, that wild card has now looked to have come up an ace.
High-Efficacy Vaccines Awaiting Distribution in 2021
100%
90%
80%
95.0% 94.1%
70%
60%
50%
40%
30%
20%
10%
0%
Pfizer BioNTech Moderna
Source:Source:
PfizerPfizer,
Press Release, “Pfizer and BioNTech Conclude Phase 3 Study of COVID-19 Vaccine Candidate, Meeting All
Moderna
Primary Efficacy Endpoints,” November 18, 2020. Moderna Press Release, “Moderna Announces Primary Efficacy Analysis
in Phase 3 COVE Study for Its COVID-19 Vaccine Candidate and Filing Today with U.S. FDA for Emergency Use Authorization,”
November 30, 2020
In our opinion, while GDP growth rates over the next two quarters may now be in jeopardy of
decline, these short-term trends are more than overshadowed by the vaccine game-changer
news that now shines as the first real light at the end of the COVID-19 tunnel. In what could
soon be recognized as the most remarkable accomplishment in medical history, concept was
taken to proof of concept and then to medical outcomes at a warp speed never seen before in
the history of science.
As the critical developments of the vaccines’ distribution to the public play out, it is
important to realize the magnitude of this moment. The irresistible force will soon be available,
and the immovable object could finally begin its move away. From an economic standpoint,
this far outweighs a few months of potentially flat or negative GDP, as the pent-up demand
unleashed in 2H 2021 should prove substantial. Medically and socially speaking, we are
looking at prayers answered.
14THE ROLE OF THE FED WILL REMAIN CRUCIAL
The Fed was the first to arrive when the economic damage of COVID-19 initially appeared evident last March,
and now markets are taking comfort in the notion it could be the last to leave.
Going all the way back to those first two weeks of March, Chairman Jay Powell and his fellow Federal Open
Market Committee (FOMC) colleagues were the first to realize the economic carnage COVID-19 was about to
wreak and decisively acted by taking the Fed Funds rate from 1.50% to zero, and then quickly re-implementing
large-scale asset purchases of Treasury bonds and mortgage-backed securities (MBS) at a pace of $120
billion per month. Combined with newly Federal Reserve-sponsored programs authorized by Congress and
the Department of the Treasury, such as the Primary Market Corporate Credit Facility and Secondary Market
Corporate Credit Facility, the Fed quickly and efficiently stood ready to provide liquidity and credit support in
unprecedented volumes. More than anything else since the virus-induced economic shock began last February,
the Fed’s efforts to ensure access to credit and functioning markets ensured a single calendar quarter of
disastrous market and economic downturns was not elongated and could be soon reversed.
Decisive Fed Action
Lower for Longer is Likely
2.75%
2.50%
2.25%
2.00%
1.75%
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%
0.00%
5/31
6/30
7/31
8/31
9/30
10/31
11/30
12/31
1/31
2/29
3/31
4/30
5/31
6/30
7/31
8/31
9/30
10/31
11/31
Fed Funds Target Rate
Source: Bloomberg
Source: Bloomberg
Looking forward, we feel the Fed’s interest rate and monetary policies will remain crucial to the economy’s
recovery and the continued health of the markets, and we also believe nobody probably knows this more than
the Fed itself. Therefore, we do not expect to see an increase in the Fed Funds rate anytime in the foreseeable
future, which would probably mean until at least 2023. In addition, we think the Fed will maintain its level of
$100 billion plus in large-scale asset purchases for at least the next year and likely longer. Therefore, we believe
this ongoing low interest rate environment and open market activity should continue to be tangible economic
and market tailwinds in 2021 and beyond.
15MORE FISCAL STIMULUS WILL BE NEEDED
While the Fed has been earning straight A’s on the monetary side, Congress is looking
at report cards with much lower grades on the fiscal side. After passing the $2.2 trillion
Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March, the economy is
now in dire need of a follow-up package of a similar magnitude. Since last summer, the two
parties have been in continuous negotiations with House Speaker Nancy Pelosi and Treasury
Secretary Steven Mnuchin on the front lines. However, as the election came and went,
disagreements over the total size of the package and amounts of dollars provided to state
and local governments prevented deal closure.
There is now some probability we could see an interim package in the $1 trillion range
directly focusing on unemployment insurance, Paycheck Protection Program loans to small
businesses and assistance to state and local governments. This effort had been originally
constructed through a bipartisan group of Senators, and while a trillion or so in relief is
certainly appreciated at this point, it is unlikely to be enough as we believe more will be
needed in the months ahead.
We are confident a more complete relief and stimulus agreement will eventually be reached,
probably sometime in 1Q 2021. Should the Republicans hold the Senate by winning at least one
of the runoff elections on January 5, the total amount would likely be in the range of about $2
trillion. In the event the Democrats win both races and regain an effective majority, the number
could move closer to $3 trillion. In either case, time is of the essence and further delays,
when combined with rising virus cases and business shutdowns, could push 1Q 2021
GDP growth into negative territory.
JOB GROWTH SLOWING
Since the historically horrific employment report of April, when the economy lost more than
20 million jobs and the unemployment rate rose to more than 14%, the steady drumbeat of
positive job growth has served as an engine of growth during the recent recovery. However,
that drumbeat is now finishing the year with a diminishing echo.
Monthly Job Losses / Gains and Unemployment During COVID-19 Pandemic
14.7%
15%
10%
6.7%
3.5% 5%
+4.8M
+2.7M +1.8M +1.5M +711k
+184k +214k +251k +610k +245k
0%
-1.41M
-5%
-10%
-20.8M
-15%
12/19
1/20
2/20
3/20
4/20
5/20
6/20
7/20
8/20
9/20
10/20
11/20
Nonfarm Payrolls Month Over Month Change Unemployment Rate (% RH)
Source: Bureau
Source: Bureau of Laborof Labor Statistics
Statistics
16In the six months of May through October, job gains had been dramatic, as over 12 million people,
representing more than half of those lost April jobs, had reentered the workforce and the November
unemployment rate concluded at 6.7%. As a basis of comparison, a comparable unemployment
rate was not reached until four years after the worst of the financial crisis in 2009, which had
peaked at a much lower level of 10%.
COVID-19 Pandemic
Unemployment Falls Faster Than After Financial Crises
14.7%
16% 4/20
14%
12%
10.0%
10/09
10%
8%
6.7%
6% 11/20
4%
3.5%
2% 2/20
0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Bureau of Labor Statistics Unemployment Rate (% RH)
Source: Bureau of Labor Statistics
While these job gains have certainly been good news, the rate of growth does not appear
sustainable and it could soon be in directional jeopardy. Since June, the monthly job gains have
fallen from 4.8 million to 245,000 in November, and this trend serves as one more reason why
it is vital for Washington to get additional fiscal stimulus passed and signed into law. Otherwise,
we could be looking at a scenario where positive job growth is threatened until the vaccines reach
widespread distribution months from now.
INFLATION REMAINS BENIGN
Even before the COVID-19-induced economic shock and recession, there had been no growing
signs at all of inflation breaking out of its multiyear funk and approaching the Federal Reserve’s
long-term target of 2%. The deflationary pressures of the past nine months have only exacerbated
inflation’s virtual absence in the economy and while theories abound as to how this might change
in the future, we are not holding our breath.
October’s Consumer Price Index (CPI)* growth was flat for the month and 1.2% on a yearly basis.
The Core CPI (ex. food and energy) was only up 1.6% annualized. The Fed’s preferred measure,
Personal Consumption Expenditures (PCE), also posted unchanged readings for its October
headline and core numbers. PCE in total displayed an annualized increase of just 1.5%.
*The CPI measures the average change in prices over time that consumers pay for a basket of goods and services,
commonly known as inflation.
17Inflation Remains Benign
Personal Consumption Expenditures (PCE) Index Over Past Decade
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
PCE Y/Y % Core PCE Y/Y % Long-Term Fed PCE Inflation Target
Source: Bureau of Economic Analysis
Source: Bureau of Economic Analysis
Inflation Remains Benign
Consumer Price Index (CPI) Over Past Decade
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
CPI Y/Y % Core CPI Y/Y %
Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
So those waiting for inflation to pop will have to wait at least a bit longer. Of course there are calls that the immense influx
of dollars to fund recent and future fiscal stimulus, as well as the trillions created by the Fed, will eventually manifest itself
in higher long-term inflation rates, and this may well prove to be the case — someday. However, until inflation exceeds
the Fed’s 2% target on a sustained basis, we will continue to view these low consumer price levels as non-threatening
and beneficial to the ongoing economic recovery.
18CONSUMER SPENDING ALSO LOOKING FOR A BOOST
Consumer spending, representing the aggregate purchases of all goods and services by
individuals and families, was one of the first metrics to emerge from the economic shock last
spring when break-out monthly growth of 8.2% in May and 5.6% in June portended the record
quarterly GDP growth upcoming in 3Q. However, since then, monthly growth has fallen to
barely positive and serves as yet another important metric waiting on additional fiscal relief
and stimulus.
Consumer Spending
Monthly Growth During Pandemic
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
10/19 11/19 12/19 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20
Source:Source:
Bureau ofofEconomic
Bureau Analysis
Economic Analysis
Accounting for approximately one-third of total GDP growth, consumer spending is a crucial
metric. Therefore, these recent monthly reports could be evidence of the challenges awaiting
the broader economy in the upcoming winter months. However, we would emphasize
consumers have proven extremely resilient throughout recent cycles and we would expect
them to be the first to show strength when we reach wider circulation of the vaccines.
THE BIG PICTURE
In a year featuring unfathomable economic numbers, the final tallies for 2020 are likely to
look pretty rough but far from the terrifyingly horrendous annual forecasts many had put
forth when the virus first shutdown the country back in March. It now looks that when the
4Q concludes, we will be looking at a yearly contraction of about -4%. This would rank as
the fifth-worst year since 1929, but realistically speaking, still basically created by one single
three-month exogenous shock followed by a nearly equivalent recovery. More importantly,
2020’s annual GDP will soon be water under the bridge best seen through a rearview mirror.
Source: Bloomberg
Growth in 4Q 2020 became more challenged as virus case numbers exploded and follow on
economic relief from Congress failed to materialize. Following the exceptional 3Q recovery,
the growth comparison was always going to be a tough one in 4Q, but these two developments
will probably suppress that comparison worse than most may have thought just months ago.
We are therefore looking for 4Q GDP to increase by only about 3% annualized, and more
importantly, this pace does not appear sustainable into 1Q 2021.
192020 U.S. GDP Estimate
Estimated To Be Among Worst in History
20%
15%
10%
5%
0%
-5%
2020
-3.7%
-10%
-15%
‘30 ‘35 ‘40 ‘45 ‘50 ‘55 ‘60 ‘65 ‘70 ‘75 ‘80 ‘85 ‘90 ‘95 ‘00 ‘05 ‘10 ‘15 ‘20 (Est.)
Source: Bloomberg, Bureau of Economic Analysis, Federal Reserve 2020 Estimate
Source: Bloomberg, Bureau of Economic Analysis, Federal Reserve 2020 Estimate
These short-term pressures could accelerate during 1Q 2021, perhaps creating anemic growth for
the first three months of the new year or even pushing us back into negative terrain. Should that
occur, we would not view it as a double-dip recession or even a W-shaped recovery. We would
view it more as the storm before the calm.
We look for a strong acceleration in growth during 2H 2021 as vaccines become nationally
accessible, business restrictions and social distancing loosens, and pent-up demand is released
into the economy. We think this could result in upwards of 6% growth for the latter half of 2021,
translating to about 4% annualized growth for the year in total and back once again to the
aggregate pre-virus levels of 2019.
U.S. Aggregate GDP
Seeking Return to Pre-COVID Levels
$19.3T
$19.1T
$19.0T $19.0T $19.0T
$18.6T
$17.3T
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20
Source: Bloomberg, Bureau of Economic Analysis
Source: Bloomberg
20Moreover, once there, we believe the economy will continue to benefit from trillions of dollars in both fiscal and
monetary stimulus and close to zero short-term interest rates for at least two more years, if not longer. This could keep
the economy above previous pre-virus trend growth of 2%, which in our opinion would continue to provide a favorable
backdrop for investors.
WHERE WE STAND: U.S. ECONOMY
• We believe investors need to differentiate between short- and long-term economic prospects in the economy.
• Economic growth could be challenged in 1Q 2021 as COVID-19 cases continue to rise substantially and additional
fiscal economic relief and stimulus from Congress remains elusive.
• However, we would look for the economy to accelerate meaningfully in 2H 2021 as vaccine accessibility drives
loosening business and social restrictions, additional fiscal stimulus eventually filters through the system,
and pent-up demand is released by consumers and businesses.
• This could result in the U.S. economy achieving annualized economic growth of 4% in 2021 and once again
reaching pre-virus levels of annualized real aggregate GDP.
• Once this occurs, we see the Fed as continuing to be highly accommodative in terms of interest rates and
open market activity, providing further tailwinds for a post-virus economy favorable for long-term investors.
21U.S. STOCKS
There are likely strong long-term opportunities in U.S. stocks,
however investors may need to incur some downside risks during
the first few months of 2021 before the vaccines reach widespread
distribution. Thereafter, catalysts include economic and earnings
recoveries, a lower-for-longer interest rate environment, and
additional liquidity-based monetary stimulus from the Fed.
Our year-end price target on the S&P 500 is 4,200, and we
believe value stocks could finally be setting up for a meaningful
catch-up period versus growth stocks as the year progresses.
We believe U.S. stocks are likely setting up for a strong year in 2021, although the initial months
could be subject to downside risk as various COVID-19-related uncertainties work themselves out.
It is clearly a unique time for equity investors as the markets look to turn the corner on COVID-19
in the year ahead. However, doing so may require staying invested through far worse virus numbers
than anything we have seen to date — if that even seems possible to imagine.
For this reason, we believe it is important to recognize short-term volatility in stocks between
now and the spring will probably translate into longer-term opportunity. Perhaps it might be best
for investors to look at the long-term criteria positioned to drive stocks higher over the next couple
of years before fretting over what could take them lower at times over the next few months.
The longer-term case for stocks and why investors may want to be in on that case as 2021
begins is based on what we see as a handful of powerful trends continuing to gather steam.
These include:
• The economic recovery continues to run ahead of initial expectations
• Corporate earnings growth also appears positioned to outpace earlier forecasts
• Interest rates should remain low for the foreseeable future
• The Fed will be continuing to provide liquidity-based monetary stimulus
• Given all these factors, stock valuations continue to appear attractive
It is these key criteria, in our opinion, that will be the basis of higher stock prices between
now and the end of 2021 and beyond.
22THE ECONOMIC RECOVERY THAT BEGAN LAST SPRING
IS RUNNING AHEAD OF EXPECTATIONS
Following the devastatingly painful economic shock in 2Q 2020, initial forecasts were that
aggregate U.S. GDP would not reach pre-virus levels last seen in 4Q19 until sometime in late
2022 or early-to-mid 2023. Given the exceptional rebound in 3Q 2020, as well as recent
vaccine news, we believe there is a strong probability pre-virus aggregate GDP can now
be re-achieved by the end of 2021, reflecting a much earlier timeframe beneficial for stocks.
Economic Volatility
Quarterly GDP During COVID-19 Crisis
35%
30% 33.1%
25%
20%
15%
10%
5% 2.9% 2.6% 2.4%
1.5%
0%
-0.5%
-5%
-10%
-15%
-20%
-25%
-31.4%
-30%
-35%
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20
Source: Bureau of Economic Analysis
Source: Bureau of Economic Analysis
We believe economic growth will likely begin slowing in 2021 and perhaps even turn negative
in 1Q. However thereafter, with vaccines readily accessible to the general public, the next three
quarters could average better than 6% annualized growth as pent-up demand drives aggregate
GDP for the year by about 4%. There could be upside to these numbers depending upon other
variables, such as the timing of vaccine distribution, the willingness of local governments to
loosen business restrictions, and the timing and dollar amount of further economic relief
from Congress.
23CORPORATE EARNINGS SHOULD ALSO FULLY RECOVER BY THE END OF 2021
We now also believe there is a high likelihood that along with the economy, corporate earnings
growth will accelerate meaningfully in 2H 2021 and could surpass its annual pre-virus level of
2019. Current Factset Earnings Insight estimates now call for approximately $170 in S&P 500
operating earnings per share for CY 2021, representing about a 22% increase from 2020 but
more importantly above CY 2019 record-level earnings of $163.
Corporate Earnings Recovery Expected in 2021
Annual Operating Earnings Growth of S&P 500 Companies 2019-2021
25%
20%
21.9%
15%
10%
5%
3.6%
0%
-5%
-10%
-14.2%
-15%
-20%
CY 2019 CY 2020 (est.) CY 2021 (est.)
Source:Source:
Factset Earnings
Factset Insight,
Earnings Insight, November
November 20, 2020 20, 2020
Like the broader economy, this upshot in profits growth will be back weighted and subject to
momentum in consumer spending, business re-openings, and the implementation of fiscal
stimulus. More of these factors seem to have now been recognized in upgraded forecasts, as the
CY 2020 Factset Insight consensus estimate has increased since July by more than 10%, from $126
to $139, and the CY 2021 estimate by more than 4%, from $163 to $170.
INTEREST RATES SHOULD REMAIN LOW FOR THE FORESEEABLE FUTURE
History has shown that, for the most part, low interest rates and stocks are very good friends.
With that premise in mind, it looks like the last line of Casablanca may be in order, for at least
a couple of more years.
Interest Rate Tailwind
Lower-for-Longer Begins
3.25%
3.00%
2.75%
2.50%
2.25%
2.00%
1.75%
1.50%
1.25%
Lower-for-Longer
1.00%
0.75%
0.50%
0.25%
0.00%
5/16 11/16 5/17 11/17 5/18 11/18 5/19 11/19 5/20 11/20
Fed Funds Target Rate 10-Year U.S. Treasury
Source: Source:
Bloomberg
Bloomberg 24We believe the Fed will not be raising short-term interest rates until at least 2023 and quite
probably further out than that. While the yield curve is likely to steepen modestly this year with
the 10-year Treasury rate re-eclipsing 1% or higher, we are still looking at an extremely low rate
environment by historical standards. This should prove advantageous for the profitability of public
companies and for stock valuations.
THE FED IS LIKELY TO CONTINUE ONGOING LIQUIDITY-DRIVEN STIMULUS
In addition to overseeing a lower-for-longer interest rate environment, we believe the Federal
Reserve will also continue to provide liquidity to the markets in the form of ongoing large-scale
asset purchases. The Fed is currently purchasing about $120 billion per month in Treasury bonds
and MBS, and we expect this level of activity to continue throughout all of 2021.
Monetary Policy Tailwind
Balance Sheet Expands as Open Market Activity Ramps Up
$8.0
$7.5
$7.0
$6.5
Trillions
$6.0
$5.5
$5.0
$4.5
12/19 1/20 2/20 3/20 4/20 5/20 6/20 7/20 8/20 9/20 10/20 11/20 12/20
Source: Federal Reserve
Source: Bloomberg
Previous market cycles have shown a strong correlation between high levels of Fed open
market activity and stock returns. Such was the case during November 2008–November
2014, when stocks averaged better than 17% annualized total returns as the Fed purchased
more than $4 trillion of bonds in the open markets over those years through three separate
and intermittent programs.
STOCK VALUATIONS REMAIN ATTRACTIVE
While many are calling current equity valuations stretched, we believe investors should not take
current price-earnings multiples and simply compare them to past levels. Doing so, in our opinion,
not only misses the potentially accelerating profits as we emerge from the COVID-19 crisis but also
fails to account for the historically low interest rate environment and the relative value that now
holds for stocks.
For this reason, we often look to a metric known as the Equity Risk Premium (ERP) serving as a
basis of comparison between stock earnings yields and longer-term, risk-free rates. This relatively
basic equation simply subtracts the current 10-year Treasury bond yield from either current or
forward-looking S&P 500 earnings yields and compares that differential to past levels.
25Equity Risk Premium (ERP) Earnings Yields and Interest Rates
(2020 Estimated Earnings Yield)
40%
Subsequent 3-Year Annualized Return 11/30/20 ERP: 3.00%
30%
11/30/20 20%
S&P 500 Forward Earnings Yield 3.84%
minus 10-Year U.S. Treasury Yield 0.84%
Equity Risk Premium 3.00% 10%
Forward earnings yield calculated as next
calendar year expected EPS/current 0%
index value.
-10%
-20%
-3% -2% -1% -0% 1% 2% 3% 4% 5% 6% 7%
Equity Risk Premium
Source: Bloomberg, FactSet, Transamerica Asset Management , Inc.
Therefore,
Source:when looking
Bloomberg, FactSet,at the ERP on
Transamerica stocks
Asset as of November 30, the S&P 500 maintained an expected earnings yield of
Management
3.84% on forecasted CY 2020 operating profits of $140, and 4.66% on 2021 forecasted profits of $170 (Factset Earnings
Insight, November 20, 2020). When subtracting out the 10-year Treasury yield of 0.84% (November 30 closing yield),
this calculates to ERPs of 3.00% for 2020 and 3.83% for 2021, representing historically attractive entry points of which
comparable past levels have provided for above-average future three-year returns. In applying this metric combining both
earnings potential and current interest rates, we continue to view stock valuations as attractive.
Equity Risk Premium (ERP) Earnings Yields and Interest Rates
(2021 Estimated Earnings Yield)
40%
11/30/20 ERP: 3.82%
Subsequent 3-Year Annualized Return
30%
11/30/20 20%
S&P 500 Forward Earnings Yield 4.66%
minus 10-Year U.S. Treasury Yield 0.84%
Equity Risk Premium 3.82% 10%
Forward earnings yield calculated as next
calendar year expected EPS/current 0%
index value.
-10%
-20%
-3% -2% -1% -0% 1% 2% 3% 4% 5% 6% 7% 8%
Equity Risk Premium
Source: Bloomberg, FactSet, Transamerica Asset Management , Inc.
26WILL HISTORY RHYME?
Mark Twain once said, “History may not repeat itself, but it often does rhyme.” With this in mind, it may be worthwhile
to revisit a potentially rhyming element to current market conditions we first brought up a few months ago.
Back in 2011, in the aftermath of the financial crisis, the Fed was three years into a zero-interest-rate environment and
in between its second and third formalized quantitative easing program, implementing large-scale open market asset
purchases of Treasury bonds and MBS. In the autumn of that year, it became apparent that both real aggregate GDP
(inflation adjusted) and S&P 500 operating earnings would be reaching record highs by year end and finally eclipsing
their pre-crisis levels from before 2008. Yet the Fed remained exceptionally accommodative, maintaining zero rates
until December 2015 and, in September 2012, implementing another quantitative easing (“QE3”) program, buying $40
billion MBS monthly through November 2014.
Comparing Global Financial Crisis and COVID-19 Crisis Market Environments
Global Financial Crisis COVID-19 Crisis
(11/1/2007–11/28/2014) (12/31/2019–11/30/2020)
2,500 4,000
2,000 3,600
1,500 3,200
1,000 2,800
500 2,400
0 2,000
Nov 07
May 08
Nov 08
May 09
Nov 09
May 10
Nov 10
May 11
Nov 11
May 12
Nov 12
May 13
Nov 13
May 14
Dec 19
Jan 20
Feb 20
Mar 20
Apr 20
May 20
Jun 20
Jul 20
Aug 20
Sep 20
S&P 500 S&P 500
$8 2.0%
$5 5%
$7
$4 4% $6 1.5%
$5
$3 3%
$4 1.0%
$2 2% $3
$2 0.5%
$1 1%
$1
$0 0.0%
$0 0%
Dec 19
Jan 20
Feb 20
Mar 20
Apr 20
May 20
Jun 20
Jul 20
Aug 20
Sep 20
Nov 07
May 08
Nov 08
May 09
Nov 09
May 10
Nov 10
May 11
Nov 11
May 12
Nov 12
May 13
Nov 13
May 14
Nov 14
Fed Balance Sheet Fed Funds Rate Upper Bound
Fed Balance Sheet Fed Funds Rate Upper Bound
Source: St. Louis Fed
As we close out 2021, the current market environment is strikingly similar. Real aggregate GDP and S&P 500
operating earnings appear prepared to move above pre-virus highs sometime in the next year, the Fed Funds rate
is at a lower bound of zero, and the Fed is buying Treasury bonds and MBS at a pace of $120 billion per month.
From November 2011 to November 2014 , when all of these market conditions were much like they are now or soon
could be, the S&P 500 posted an annualized total return of better than 20%, translating into a cumulative total return
of more than 75%. While we are not forecasting equivalent returns on stocks for the next three years, the broader
message here is with a similar situation perhaps setting up in the year ahead, we could be seeing the same type of
highly favorable market backdrop this time around — and one that could potentially prove conducive to double-digit,
annualized total returns for the next couple of years.
Despite favorable long-term opportunities, immediate uncertainties
pose short-term downside risk.
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