This week’s chart highlights the history of the U.S. personal saving rate. As you can see, we have experienced a record personal saving rate in 2020. Consumers, especially high-income earners, significantly cut spending on consumer services during the pandemic. Simultaneously, fiscal stimulus supported and boosted income for lower-income consumers. The benefit of a high saving rate is that consumers can stage a strong comeback once the economy opens again.
At the time of this writing, positive vaccine news has been announced. We will likely see a vaccine ready this year and widely available next year. Encouraging vaccine developments, combined with a high saving rate, easy monetary policy and more fiscal stimulus, can drive a strong rebound in consumer spending, especially spending on services. The favorable economic outlook for 2021 will be a nice change from 2020. What does the economic recovery mean for asset prices? In my opinion, the winners of 2020 can turn into the losers for 2021, and vice versa.
The Nasdaq 100 Index has been a big winner in 2020, with work from home providing a boon for many companies in the index. However, valuations are high and positions are heavy. It will be very hard for these companies to outperform when the economy reopens.
Treasuries, especially long-end Treasuries, have been another winner in 2020. The current interest rate is close to record lows. What’s more, in recent months, the correlation between Treasuries and stocks is close to zero. Treasuries no longer offer the desired hedge for the equity part of a portfolio. This poses risks for a traditional 60/40 portfolio. When the economy recovers, even though the Federal Reserve (Fed) is committed to holding short-term rates close to zero, long-end interest rates can still move higher. Currently, there is an expectation that the Fed might announce plans during the December Federal Open Market Committee meeting to buy back more longer-duration Treasuries to support the economy. The curve may flatten on this news before a better economy in 2021 starts to steepen it again.
In 2020 and throughout the last 10 years, value stocks have significantly underperformed. With depressed valuation, a reacceleration of the economy during the second half of 2021 and the potential for higher inflation, the value and cyclical parts of the stock market should do well in 2021. How sustainable this will be depends on the future inflation outlook. An inflation environment of 2-4% will be very favorable. If we see the risk of deflation or disinflation, growth stocks will likely outperform again.
Lastly, when talking about winners and losers, I have to mention retail. 2020 is the year of retail investors. These investors bought aggressively in March and bet heavily on mega-techs using call options throughout the year. We’ve witnessed record new accounts opening in the U.S., China and many other countries. Most retail investors have been successful in 2020. Will that continue in 2021? How will this retail trading frenzy end? These developments will be very interesting to watch.
The economy shrank by about 3.5% in 2020 as a result of the coronavirus. The recent spike in infection cases might bring about more soft lockdowns and temporarily slow down the economy. However, with high consumer savings and ample liquidity in the financial system, the economy is expected to grow again in 2021.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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