Every January, I write-up my forecasts for the year. These are good primarily for entertainment value, although once in a while I get a few things right.
Last year's forecast went completely off the rails for a few months, as COVID-19 became my biggest "futurist fail" ever. However, the mostly bullish outlook wasn't too far off... thanks to multi-trillion dollar government stimulus packages that kept the economy going. As expected, it was a HUGE year for tech stocks.
This promises to be another interesting year.
COVID-19 was a global social experiment in which entire industries went on ice. We put everything into the freezer. A year later, we'll open up door and see what stayed fresh.... and what went bad. There are always a few surprises.
Even if you wait a little longer to open up the freezer, those surprises don't go away.
Here's what I'm looking for:
1) Massive write-offs in commercial real estate. This will include offices, retail, and potentially multi-unit residential. Big cities are going to be hit harder.
This leads to....
2) Potential melt-down of the commercial mortgage-backed securities market (CMBS). I'd be careful with exposure to bank stocks right now.
Which takes us to....
3) More bail-outs and stimulus programs. These might include special packages for airlines, banks, and infrastructure spending.
As we go enter into a new decade, we will move from low inflation to somewhat higher inflation. The early stages of inflation aren't always bad. Problems start to happen when interest rates rise
There is another problem with inflation. It weakens the purchasing power of the dollar.
This is one of the reasons why we might see...
4) A bubble followed by a boom in crypto assets. Bitcoin is considered by some to be "digital gold." However, Bitcoin is not the endgame. There are other crypto-currencies that are faster, more flexible, and have better efficiency. The real boom will happen in these alternatives.
I would expect increased regulation of the crypto industry in the U.S., leading to greater participation by institutions and individual investors.
5) Bubbles are fun... until they aren't.
We are beginning to see signs of frothiness in the stock market, particularly for tech stocks. Record-breaking IPO/SPAC/merger activity usually happens in the later stages of a bull market, along with investor euphoria. We are also seeing valuations that are completely bonkers, with Tesla trading at thirty times annual revenues.
It's been a lot of fun, but the best way to play tech seems to be outside the U.S. Overseas, I'm seeing better valuations, stronger momentum, and healthier consumers.
I'd like to see more sectors of the market participate in the gains. Transportation, infrastructure, and energy stocks could be well-positioned in a post-Covid recovery and are worth a second look after lagging last year.
With any luck, we could continue to have a bull market for a while if investors maintain their high levels of confidence. How will that confidence be shaken (and when)?
-Jim Lee, CFA, CMT, CFP®
