Enjoy the Quiet In 2021, But Be Vigilant About the End
(AP Photo/Steven Senne)
Enjoy the Quiet In 2021, But Be Vigilant About the End
(AP Photo/Steven Senne)
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Despite 2020’s angst, the global economy is poised to rebound.  Sentiment is warming.  A politically tumultuous lame-duck stretch should yield to an increasingly benign political backdrop. It’s a recipe for US and world stocks to shine in 2021. Keep your cool, though—while most believe we are early in the upturn, I see this bull market stealthily slipping into its later stages.

Awful as 2020 was, stocks prevailed handily. Of course, the road to 2020’s double digit gains featured unprecedented COVID-19 economic lockdowns, an economic implosion and, importantly, an all-time record-fast bear market, highlighting a crucial lesson: Exit stocks only if you see a huge negative others don’t. Those who coolly followed that rule rode markets’ rocket-ship recovery from March’s lows.

That applies now. Bear markets have two causes: Either a wallop—a huge, unforeseen shock wiping trillions of dollars off GDP, like the lockdowns. Or euphoria inflates expectations to unattainable levels. 

I see no wallop now. Yes, COVID’s resurgence brought renewed restrictions on businesses and individuals across America—from indoor dining bans to non-essential business limits and curfews. Those and similar restrictions spanning Europe and Asia can trigger short-term economic setbacks. But that is no wallop. At home and globally, manufacturing activity keeps expanding. Services firms—devastated during spring’s lockdowns—are faring far better this time despite some isolated contractions. Retailers shifted their focus to online ordering. Restaurants ramped up takeout options.  Hence: even amid partial lockdown, global service sector activity expanded in December.

Moreover, nearly everyone expected renewed restrictions, sapping shock value. Markets pre-priced it, looking far ahead like they routinely do after panics—to when COVID is history. As 2021 progresses, expect continued growth as economies begin normalizing amid COVID vaccine rollouts.

Politically, gridlock reigns globally, making surprises unlikely—which markets love. Yes, the Democrats’ Georgia Senate sweep means President-elect Biden’s party will control both Congressional chambers. But the House margin is Democrats’ smallest since 1900. Their Senate advantage? The slimmest possible. The 50/50 split—with Vice President-elect Kamala Harris voting only to break ties—makes Biden the first Democrat President to begin without a clear Senate majority since Grover Cleveland in 1885. Anything shy of complete party unanimity kills bills—and internal fissures make Democratic solidarity on controversial issues a negligible. 

Centrist Democrats—today’s powerbrokers—will block anything extreme. Arguably the most conservative, West Virginia’s Joe Manchin, is already demonstrating this. He killed the idea of eliminating filibusters right after the election. Now he’s expressing doubts left and right. He is probably and quietly more powerful in the Senate right now than Majority Leader Chuck Schumer.  But there are another handful of Democratic Senators who each aren’t that far behind, and all coveting the power it gives them. Gridlock usually comes after the midterms. Not this time. It’s right here; right now. 

Overseas, is similarly benign politically. Brexit’s conclusion finally zaps one lingering source of uncertainty—and the smooth exit undercut fears. Germany’s “Grand Coalition” of Christian Democrats and Social Democrats is stumbling toward September’s election—the former lacks any popular candidate to replace Angela Merkel and the latter features deep internal divisions. The European Parliament? Gridlocked from 2019’s elections through 2024. Each major country is in its own way. All great for stocks.

Sentiment-wise, optimism is growing yet not overflowing--yet. It is worth watching throughout 2021, as I detailed in my last column. Of 19 sentiment metrics I track, 9 signal euphoria, including IPO performance. Another 10 indicators , show only mild optimism, skepticism and even pessimism.

This warming sentiment is a hallmark of a later-stage bull market—despite this bull market technically being only 10 months old. That doesn’t surprise. While its magnitude and fundamental justification by definition made it a bear market, 2020’s plunge and subsequent bounce off the bottom, both behaved more like a hugely oversized correction, as I’ve explained here many times. The economic downturn also was atypical—not a natural reset as businesses worked off excess, but a sudden, government-imposed contraction. That matters. While most pundits now hype value stocks for their historical early-cycle strength, expect stocks to act like an ongoing late cycle—which favors growth.

It should bring big returns, as rising optimism expands valuations. If you divide history’s bull markets into sixths by length, the first sixth is strongest, averaging 40.4% annualized returns. But the last sixth—roughly where I see us all year—is second, averaging 24.3%.

You don’t want to miss that for fear of a bear market ahead—and there is no need to act early. 2020 aside, bear markets usually begin slowly—rolling over with a whimper, not a bang, as exuberant investors dismiss risks. Those blinded by early-stage bull market talk will likely shrug off hints of excess—potentially setting the stage for stock-slamming negative surprises. 

But that should come later. Euphoria isn’t actually here yet. And when it does emerge, it isn’t actually a sell signal. Some of history’s best years were while euphoria boiled. It’s when euphoria blinds investors to major negatives you must worry. Maybe—and I mean maybe—that is 2022. Don’t fret that now. Stay vigilant for emerging new excesses and unseen negatives. But in route, enjoy 2021’s quieter politics and increasing economic normalcy—boosting stocks far and wide.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here

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