2020 was one for the record books in terms of market and economic volatility. In the latest Portfolio Intelligence podcast, Co‐Chief Investment Strategists Emily R. Roland, CIMA, and Matthew D. Miskin, CFA, look back at the year that was, and offer their 2021 outlook. The strategists discuss how COVID‐19 vaccines may alter the economic trajectory, what they’re watching in equity markets, why inflation should remain subdued, and where to find yield in a low‐rate environment.
John Bryson:
Hello, and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting at John Hancock Investment Management. Today is December 10, and I'm joined by Emily Roland and Matt Miskin, our co‐chief investment strategists at John Hancock Investment Management. Matt and Emily are the architects and brains behind our quarterly capital markets outlook piece that we call Market Intelligence. Matt and Emily, welcome to the call.
Emily Roland:
Thanks for having us.
Matt Miskin:
Yeah, thanks for having us, John.
John Bryson:
So you two have been frequent guests throughout 2020. I'd love to go and recap 2020, kind of look back what stood out to you in terms of highlights and surprises, maybe touch on the economy and on the markets. Matt, maybe I'll ask you to answer that question.
Matt Miskin:
Well, this year was one that was certainly full of surprises, and while there were certainly negative surprises—a global pandemic certainly comes to mind—and that we had a lot of economic challenges in the first half of this year, there were positive surprises, too. Some of the dates that I think I will always remember for the rest of my career, March 23, for example, was the low in the market. That was the day that the Fed surprised all of us by starting the operation to buy corporate bonds or, at least, giving that forward guidance that they had capital to buy corporate bonds that had never happened before; so they announced that on the 23rd. The 27th was the signing of the CARES Act, one of the largest fiscal policy and government‐led economic stimulus packages in history. And in our view, that was a very wellthought‐out and effective program in terms of the economic rebound we've seen.
Matt Miskin:
It certainly was costly, though. And then, just here in the first week of November, about a month ago, the fact that the vaccine development has come so quickly. November 9 was the day that Pfizer came out with the news of a 90% effective vaccine, at least in trials. And all these positive surprises—even though we had such a negative and tough start to this year—these positive surprises have brought markets back, and we're sitting here with some pretty nice returns and a balanced portfolio. I think as you look back on this year, while there's a lot of things that didn't work out, there was a lot of good things that ended up happening for markets, and hopefully that can continue into next year.
John Bryson:
Yeah, no doubt 2020 was a unique year, not to be repeated. So, Emily, as you and Matt look back, obviously you're also looking forward, thinking about the major themes to consider in 2021. Maybe let's start with the macro themes. What are you seeing, and what are you telling people to be aware of out there?
Emily Roland:
Well, I think, John, really that using the word surprise is important here. And I think the challenge going forward, to us, is that it's going to be hard to surprise markets on the upside in such a meaningful way again. And all of that fiscal and monetary support: That's really a key reason that the S&P 500 and global markets broadly are up double digits year to date. So the challenge that we see is that the amount of stimulus provided this year probably won't ever be matched again. We spent $2, $3 trillion, in the CARES Act; the Fed increased their balance sheet by over $3 trillion; rates are held near zero now, and we're probably going to be pin down near zero here for years to come, so financial conditions are very loose.
That's been supportive of markets, but it's hard to imagine them being much looser than they are today.
Emily Roland:
The good news out of that is that we'll be able to refocus on fundamental analysis, look at things like corporate earnings in terms of what's going to be driving markets, and move past the drivers today, which have been around vaccine news and around fiscal stimulus. Those are things that tend to be difficult to handicap. Another kind of key macro theme that we think about is really around inflation, and we see a lot of investors very much concerned about it. Inflationary pressure is building, and the idea being that when you add to the deficit that should increase the supply of dollars, which could result in an inflationary environment. Our view is a little bit different than consensus. We actually see inflationary pressure staying fairly subdued in 2021.
Emily Roland:
There's still a lot of slack in the economy. If you look across the jobs market, we still have a very big hole to dig our way out of. We're very encouraged by the progress we've made in terms of restoring a lot of the jobs that were lost during COVID‐19. But there are still over nine million Americans who had jobs in February that don't have them now, and that was some of those special benefits potentially expiring at the end of the year. We think that could create a rough patch here in the economy, and so it also means that there's still a lot of slack. And we've seen things like temporary increases inflation, things like used cars, this great sort of surge that we've seen in terms of the housing market. Some of those things may be transitory as we head into 2021.
Emily Roland:
So we're not overly concerned about inflation, and that means that bonds can continue to perform well—I know we’ll talk about that in just a minute—and it should be a fairly decent environment for equities as well. The final thing I would say in terms of macro themes is kind of just looking at the economic picture globally, and when we look across the U.S. and developed and emerging markets, what we really see is China driving growth right now.
Emily Roland:
You look at things like PMI data: China's really come out of the other side of the virus; their economy is growing quite rapidly, but they've already pulled a lot of levers to spur growth. You look here in the U.S., we're encouraged again by the improvement in economic data here, but then you look overseas, and PMI is out of the eurozone and Japan has moved lower primarily based on services dropping. So we see this sort of multispeed world opening up as far as the economic growth backdrop goes with China and the U.S. holding up the best, and then the rest of the emerging markets and developing markets failing to keep up, and that's some key implications across investments as well.
John Bryson:
Excellent. So, Emily, I'm going to stick with you, and I'm going to ask you to transition. So we know that the economy and the markets are two different things. Maybe kind of carry the big themes you're looking for in 2021, for markets and specifically equities.
Emily Roland:
Yeah. So we do look at the economic trajectory as far as thinking about where to invest. And when we think about the economy, the same sort of themes are playing out from an earnings perspective. We use forward earnings estimates as a guide about where to think about investing from a multi‐asset perspective, and we look at the S&P 500: Earnings are expected to be up about 22% year over year, from 2020 to 2021. When we look overseas, we see the MSCI EAFE, which is a broad representation of non‐U.S. developed markets. They're excited to see 37% earnings growth, and then emerging markets, at 27%. So that’s a pretty high bar to meet. But when we look at things on a relative basis, even though all three of those might be optimistic, we do think that the U.S. and emerging markets are more likely to deliver on those expectations.
Emily Roland:
So we do continue to have a preference for the U.S. over non‐U.S. developed markets. And the other kind of element of that is that we are continuing to maintain an overweight to the quality factor. We want to continue to own companies that have the ability to generate stable earnings, have the ability to grow organically throughout a market cycle, to have good ROE and those other types of elements, and you find a lot more of that in a lot more sectors that have those quality attributes in the U.S. So it's areas like technology and communication services, which are big overweights in the U.S., whereas, internationally, you've got a lot more economically sensitive sectors, areas like financials, which we're still waiting to see evidence of a more sustained acceleration and economic growth to move to those parts of the market.
Emily Roland:
Now I will say, now moving back to the U.S., we do think that there's a nice catch‐up potential for parts of the market that have underperformed, so value in particular is a big one. Looking at areas like U.S. mid‐cap equity that tend to see a nice bounce coming out of recessionary periods, those are going to be our elements of offense in a portfolio. And we're mixing that with more, again, continued focus on quality growth in order to prepare for a choppy near term, but then ultimately have exposure to areas that are going to do well once we do emerge from the pandemic.
John Bryson:
Great. And, Matt, maybe I'll ask you to think and talk about the themes you're seeing in fixed income and also the U.S. dollar. I know it has an impact on all sorts of investments. Maybe you can comment on that and your thoughts going forward.
Matt Miskin:
Yeah, sure. So as we think about fixed income, the first thing we would say is that the short end of the curve or short duration strategies or cash just aren't going to cut it. And the reason why we say that is the Fed, like Emily said, is pinned down the short end of the curve, interest rates are at zero. To put this into perspective, the current cash savings rate across the country, which is usually heavily influenced by the Fed, is yielding 0.05%, and that is about $500 that you will earn on $100,000. That's not enough to keep up with inflation, even if inflation is modest, say round 1.5%, 2%. You're losing money on a real basis; the short end of the Treasury curve is not that much better. The three‐ to six‐month T‐bill is around eight basis points.
Matt Miskin:
So 0.08%. So $800 on $100,000. We believe you have to move to the intermediate part of the curve to find income, and the curve is actually pretty steep right now. So the intermediate part of the curve around the 10 years is now almost near 1%, versus that basically zero for the short end. Around the intermediate part of the curve, the Treasury market is higher than the short end, but still not providing a ton of income. You have to think about other sectors across fixed income, and you have to be able to pivot, in our view, into 2021 across sectors and be flexible with that. So we're looking at core plus or multi‐sector as our best ideas into next year. A corporate bias within the fixed‐income universe. So, you think about investment‐grade corporates. We're looking at A, BBB, and then even some high yield.
Matt Miskin:
So BB, the higher rungs of high yield look attractive to us. But if you go to the corporate side of the market in a little bit of high yield, you can generate something like 2% to 3% in income. That would be ideal for us into next year or a good bogey to target. But we believe that the Fed is going to remain steadfast on quantitative easing, remain giving forward guidance that they're going to keep interest rates very low. And we're just happy with positive yields; there's so much negative yields in the world today. There's now $18 trillion worth of negative yielding debt out there. Australia just went negative. Portugal just went negative. Spain is on the brink of going negative. So there is just so many countries with negative yields. We've got positive yields, corporates have decent , just on a relative basis, especially in the world, but even just in a multi‐asset portfolio.
Matt Miskin:
So we believe that all makes a lot of sense for the fixed‐income positioning next year. As it relates to the dollar, we do believe that the dollar could see more short‐term downside, but could see it gain footing and eventually have a comeback in 2021. Reason why we say that (1) interest‐rate differentials are very favorable, as I was just saying, for Treasuries. So you could see capital or crossover buyers come to the U.S. markets to pick up additional yield out of our Treasuries, versus the negative yielding debt that is out there in the rest of the developed world. So that could make a positive tailwind for the U.S. dollar. And then, also, as Emily said, you know what I mean, we see a multispeed world, but we see the U.S. economy doing better than most of the developed world next year.
Matt Miskin:
China is probably going to be the leader, but the U.S. may not be that far behind, and we believe that relative economic strength should eventually help currencies. And so relative to developed currencies, we believe the dollar might find footing next year and come back. I think this is why we believe that emerging markets and the U.S. can be overweight as it relates to equities, and we're going to be neutralizing emerging‐market debt. We had that as an underweight this year; we're going to be adding that to neutral and then looking for opportunities both locally and on the dollar side into 2021.
John Bryson:
Excellent. So when I look back on 2020, there were a number of things that I could highlight, and the one that I want to bring attention to is the fact that (a), we launched our Portfolio Intelligence podcast and probably (b), more importantly, Matt and Emily, you have been the first guests and the most consistent guests, and you'll be the last guests in 2020. So I want to thank you for all that you've contributed to this podcast, sharing all the insight that you're hearing, whether it be talking to the managers in our network, the other strategists, or just talking to the financial advisors. You bring great insight to the conversation, and I thank you very much. What I'd ask is that are there any closing thoughts that either of you would have for 2020 for our audience? Matt, I'll start with you.
Matt Miskin:
I go back to the negative sentiment that's out there around a balanced portfolio and whether it's the depth of the 60/40 model, or you can't use bonds anymore, or you've got to think about other ways to get equity exposure—a balanced portfolio had a great year and it delivered. Yes, in the first quarter there was volatility. Yes, there was a drawdown. I mean, we had a 10‐year run of great returns. We were due for somewhat of a drawdown, but the fact that it came back like it did, to me, speaks to the basic building blocks of building portfolios, multi‐asset investing, and we think diversification could come back next year. There were top five stocks that did so much heavy lifting in the markets this year, we believe that concentration decreases next year, and that leaves other asset classes opportunities to add value to investors. And we believe those are the great positions to have in portfolios as we go into 2021.
John Bryson:
Great. Emily, your thoughts?
Emily Roland:
Yeah. Well, Matt stole my thunder there. I completely agree that we need to have a thoughtful approach to risk for 2021. If you look at what's happening this quarter, it's remarkable what a risk‐on environment we're in right now, some of the best returns in history out of areas like small‐cap stocks, more cyclical parts of the market. And we want to keep expectations in check here. We talked earlier about this big dichotomy between the market's doing well, and are still emerging from, or remaining in, a recession here. And meanwhile, you're seeing sentiment really become more optimistic every single day.
Emily Roland:
And we're seeing it's hard to find any bears out there. They're all kind of going into hibernation for the winter. And while we are encouraged and we do want exposure to risk assets heading into next year, it's a big bar. And I think 2021 is expecting a lot of the market. So we want to be careful here. We don't want to reach too far for risks. We want to be thoughtful about where we take it, again, areas like midcap equities, et cetera. And we just want to make sure a balanced approach remains the key as we navigate what could become another complicated year.
John Bryson:
There's never anything wrong with a balanced approach to most things in life. Again, thank you both. It's been a great year. I wish you both safe and happy holidays. For our listeners, thank you for a great year. If you want to hear more, please subscribe to Portfolio Intelligence on iTunes. If you got some value out of what Matt and Emily shared, or any of our speakers in 2020, please let your friends know. Share the word and as always, thanks so much for listening to the show.
Disclosure:
This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA,SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.