By Andrey Dashkov, CFA, analyst, Casey Research
Just weeks ago, the internet was awash with lessons learned from 2020… and hopeful outlooks for the year ahead.
Many are looking to 2021 as a clean slate, with mainstream headlines claiming COVID breakthroughs “will make 2021 better than 2020.”
But I don’t think we’re in for a swift recovery. A new year won’t erase the pandemic – or the problems it caused in 2020.
And the first trading day of the New Year already delivered three critical signals, which I’ll detail below… that I believe show we haven’t seen the last of 2020’s uncertainty and volatility.
A friend of mine joked that he’s going to put 2021 on probation until he sees a consistent improvement in how things are.
And considering that just yesterday, violent armed protestors infiltrated the U.S. Capitol while Congress was in session… forcing high-ranking government officials, including Vice President Mike Pence, to evacuate the building…
I couldn’t agree more. And I think you should use the same “probation” approach in your portfolio.
Broad Markets Aren’t Out of the Woods
Looking at how broad market indexes like the S&P 500 performed last year, you wouldn’t know the world suffered one of the most acute crises in decades.
The S&P soared more than 16% in 2020, despite the 31% blow it took at the end of March, when it became clear that the pandemic was a serious threat to the global economy.
And this threat isn’t over. That brings me to the first signal.
On January 4, the first day of trading for 2021, the S&P closed more than 1% below its December 31 level.
That may not sound like a lot. But it could mean we’re in for a stock market hangover.
As of writing, the virus is more dangerous than ever. Two new strains have been discovered, one in the UK and the other in South Africa. This forced the UK into its third lockdown since the beginning of 2021.
As the new, more contagious strain has already been found in other countries, including the U.S., that may force even more lockdowns around the world.
This is the proverbial darkest hour. And things may get worse before they get better.
Inflation Expectations Are Up
The second signal is higher inflation expectations.
On January 4, the 10-year breakeven rate – an inflation gauge based on interest rates – climbed above 2% for the first time since 2018.
This tells us that the market is expecting higher inflation over the next ten years, as the government continues to spend its way out of the COVID crisis.
On the one hand, this is good news. Moderate inflation is normal after an economic crisis. It tells you that people are out there spending money, which is good for the economy.
On the other hand, inflation erodes purchasing power. You need more money to buy the same thing.
If inflation runs high in 2021, a lot of what you buy day-to-day will get more expensive.
Wall Street’s Fear Gauge Rose
As I said above, many are hoping for 2021 to be a much calmer year.
And it may be.
But on January 4, there was a third signal that this isn’t the case just yet. The CBOE Volatility Index (VIX), Wall Street’s “fear gauge,” was up 19% compared to its end-2020 level.
This means that you shouldn’t be complacent.
I urge you to err on the safe side. Put 2021 on probation, and give it some time to prove itself before rushing into apparent bargains… or panic selling on volatility.
In the meantime, I suggest adding some gold to your portfolio. It’s a safe haven against volatile market moves, as well as government spending and future inflation. And on the first trading day of 2021, gold gained more than twice as much as the S&P lost.
The SPDR Gold Trust (GLD) is a convenient way to get exposure.
The beginning of the year is also a great time to give your portfolio a fresh look.
Take profits where you can. Get rid of companies in industries with little chance of fully recovering after their COVID crash, like debt-ridden players in the travel and hospitality industries.
And hold on to the companies with solid cash balances, little to no debt, and sustainable revenues. They’ll be your best bets for facing even more uncertainty this year.
As always, make sure to do your due diligence before investing in any company. Above all, stay safe and healthy.
Andrey Dashkov, CFA
Analyst, Casey Research