This week, we hosted a 2020 Review/2021 Outlook webcast with Blaine Rollins, CFA, author of our popular 361 Weekly Research Briefing. We had several interesting questions come in from attendees, so we thought we would use this week’s blog to share Blaine’s responses.
If you would like to listen to the entire webcast, you can access the replay here.
Question: What continued impacts do you see for investors in 2021 from COVID-19?
Blaine: We fully expected that the holidays were going to be a challenge in keeping COVID cases and hospitalizations contained. We did see a rise through the year-end holidays, and we are now running in the high 3,000s-to-low 4,000s in terms of daily deaths. Good news is we continue to see the vaccine go into more arms every day now, and we are going to have more vaccines available throughout 2021.
As we look past COVID, I think the negative economic impact is going to diminish as we get the vaccinations out, and as new stimulus goes out to individuals and small businesses. There is also a new infrastructure plan coming from the next administration that could pump $2-$3 trillion dollars into many different areas of the economy and will undoubtedly create jobs. We should expect to see a rapid acceleration in jobs as people are allowed to leave lockdown and move around more freely. So, I expect we will see a euphoric environment when that happens, which could be as early as 2nd quarter.
Question: What is driving the current earning beats we’ve seen lately as we have so many people struggling right now? Is it just the other half of the country that is driving these upticks in earnings?
Blaine: It is pent up demand that is helping some of these companies beat their numbers, such as hamburger chains, cell phone manufactures, or computer/laptop companies, for example. And again, expectations have a lot to do with this. We went into both this quarter and last quarter with very low expectations for what companies would post; so people are still spending and companies are still spending. If you look at it, companies have cut back on their travel and their credit card spending, but they are still spending on rent because they can’t cancel their five-year leases. They also had to go and outfit all of their employees to work from home. I think the fact that spending has continued from the corporate and the consumer side has really helped some of these companies announce the recent numbers they have.
Question: Do you see a low return environment in the U.S. as a certainty because of the low interest rates? With interest rates so low, is P/E a good predictor of future returns still?
Blaine:Well, interest rates are the discount mechanism for your future earnings. So, as they have been low, then yes, some people have said P/E should run to infinity as interest rates go to zero. But with that said, interest rates are not going to be at zero, and if anything, you should go back and look at the chart below. What the yield curve and market is telling you is that long-term interest rates are going to pick up. We can’t think that P/Es can run to infinity. It’s going to be more challenging.
Source: J.P. Morgan
That is not to say that the U.S. is certain to be a low-return environment. If you look at the chart below, you can see there is massive dispersion in that 22x of the S&P 500 Index. I can’t remember a time when there has been more dispersion in the market. That said, given the extreme levels, there is the potential to make money by buying lower multiple valuation stocks and selling higher valuation stocks. There will still be many opportunities to make money in U.S. large cap stocks, but it might just be a bit different than the past few years.
Source: J.P. Morgan
Question: What is the outlook for U.S. dollar right now? Are foreign investments a better bet right now?
Blaine: The U.S. dollar has fallen, and now everyone seems to have a negative outlook on the U.S. dollar; but foreign economies began to recover ahead of the U.S. economy, particularly in Asia. And then looking at the size of the potential stimulus we are looking at needing to recover from COVID, investors are worried about our ability to repay all that debt, deal with the debt cost, and how much inflation we might have to create on the currency. I still do think the dollar will likely be under pressure until the U.S. can show better economic growth. If interest rates rise, maybe that will attract foreign investments, but that would come at a cost. The dollar is a tough one right now. It was an easier bet last summer.
If you look at this chart below though, it shows that the S&P 500 Index is starting to lag in performance not only against the global ACWI, but also developed markets, emerging markets, and China. This helps explain the strength in some of the non-China, non-Japan emerging markets Asian ETFs, which have been really great performers since last summer.
If you want to hear more, we encourage you to view the full webcast for more insights from Blaine.
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