The Year Ahead
Posted on: December 16, 2020
With the bulk of a tumultuous 2020 behind us, it’s appropriate that I’m writing a 2021 year-ahead piece on the first day of COVID-19 vaccinations in Canada. We’ve been through a dark year. The appropriately named 20-20 gave us everything in hindsight. To be sure, it does feel like there are brighter lights on the horizon.
On the economic front
While 2020 was projected to be an average year economically, we ended up with one of the greatest global shocks in recent history. Governments stepped in with seemingly unlimited spending. Central banks implemented every tool in the box, including Canada’s first quantitative easing. And businesses had to come up with completely new ways of operating. With that as a backdrop, we’ll review the forecasts from BMO Economics for 2021.
After the 2020 hit to GDP of -5.7%, BMO Economics is calling for a strong rebound of 5.5% in 2021.
They expect the bulk of this rebound will come from pent up consumer spending. Consumer spending on goods rebounded very quickly after the March lockdown but service spending has continued to lag.
This inability of consumers to visit their favourite restaurants, sports, salons, shows etc. coupled with historic government transfers, has caused personal savings to reach record highs in 2020. BMO Economics expects that this savings rate will grind lower assuming restrictions steadily lighten.
Home sales have been a bright spot through the year fueled by record low interest rates. The feds signalled they are happy to let this be an engine of recovery and recently increased the availability of the first-time homebuyer incentive in major urban centers.
Other important areas like business investment and exports (on the back of commodity prices) should be pulled along with the anticipated global reopening.
Lastly, with the recent announcement of a $100-billion stimulus plan over three years, government spending should also be accommodative to the recovery. We can’t conclude this section without at least mentioning the elephant in the room which is the payback of the government stimulus. That is a future item to address once this pandemic is adequately dealt with. Meanwhile, low rates abound and stimulus measures will continue to support the economy until the necessary expansion emerges.
In the U.S.
There is more uncertainty in the outlook for our neighbours to the south. Government support has been (relatively) more restrained, and the passage of a fiscal relief program is still pending. No doubt the election slowed that process down. The further announcement of a fiscal relief program is a matter of time, that much is certain. Of course, as Canadians we want to root for a US expansion because as the US goes so too does Canada.
BMO Economics is forecasting a 4.0% GDP recovery after a softer -3.5% print in 2020.
Much of this recovery will rhyme with Canada’s as consumer spending rebounds on lightening restrictions and home sales that have been similarly resilient. It’s possible that business investment gets a two part tailwind of reopening global economies plus stability from policy decisions from the new administration (as we’re less likely to see destabilizing trade wars).
The big unknown is government spending which BMO Economics has modeled as growing slightly. This could be a source of upside if Biden and team are able to push through plans from their agenda.
On the market front
There were winners and losers in 2020. Some sectors were poised to take share in a COVID world (technology and communications) while others found themselves very exposed (retail, financials, commodities). These disparities should start to converge in 2021 as economies begin the reopening process.
The cyclical heavy Canadian market trailed in 2021 but started to see some life in November on the vaccine announcements. BMO Chief Investment Strategist Brian Belski thinks that there is undiscovered value in Canada for 2021. He expects that an improving North American economy coupled with more cross-border stability will push the market to new all-time highs next year. He models this without the expectation of major oil or gold price increases.
His 2021 S&P/TSX year-end price target of 19,500 implies price upside of slightly over 11% upside at time of writing.
In the U.S.
Brian understands that valuations appear to be stretched at first glance but in this environment of low inflation and interest rates, he sees no reason they shouldn’t be sustained. Low Rates = Multiple Expansion. He expects corporate earnings growth to be the driver for the market as their rebound off of the pandemic lows continue. He sees the recovery as being broader but thinks active investing will be important as sectors/companies will benefit from reopening differently.
Under these conditions, his S&P 500 of 4,200 implies price upside of approximately 14.5% at time of writing.
Ultimately, easy monetary policies and fiscal stimulus should continue to support the North American markets and economies through 2021. The outlook is positive. Although we do recognize that some positive news was pulled forward into 2020 on vaccine announcements.
We said in last year’s piece that we expect year-ahead forecasts to come into question (they certainly did). We don’t expect this year’s crystal ball to be any more prescient. We do however, expect that fundamental research and homework will keep us grounded and allow us to help clients through whatever 2021 has in store. We will only look upon it as hindsight once it too has passed.
As 2020 showed, investors that kept calm and stayed the course, even in the face of incredible uncertainty, were able to keep their wealth plans on track. We are happy to help guide and support clients through the journey.
We wish all a peaceful and restful holiday season and a healthy and happy New Year.
If you’d like more information, Brian Belski’s full 2021 Year Ahead piece can be found under the publications tab. His Year-Ahead podcast can be found here
and a forward looking medical update podcast with Dr. John Whyte here.