This calls for an environment where stock market performance will no longer be driven by P/E valuations, but instead by earnings. Economic and earnings growth will undoubtedly be strong over the next year or two. The passing of the leadership baton will likely be an uneven shift from growth, big and U.S. stocks to value, small and non-U.S. stocks. Perhaps the biggest near-term risk to the financial markets is a larger-than-anticipated increase in inflation and interest rates. Will the debt/deficit picture for the U.S. cause problems for the dollar? Will a divided government accomplish much? And how will a Biden administration deal with an ambitious China? These are the big questions in our view. Hopefully, earnings growth from a continued reopening of the economy powered by vaccinations will keep stocks rising in 2021.
Longer-term returns for financial assets are likely to be more challenging in the coming decade. With high starting valuation levels for stocks and bonds, a normalization process is likely in the years ahead, limiting longer-term returns. Security selection within most asset classes will likely become more important. And alternative assets will likely contribute to returns as they provide risk-reduction properties. Meeting long-term portfolio return objectives will prove challenging.
Key Themes For 2021
The Economy
• The U.S. and global economies should move from a recovery to an expansion phase once vaccines are widely available and the economy can reopen.
• With the Fed remaining ultra-accommodative, inflation and interest rates could rise modestly.
• The U.S. and global political environment grows more fractious and creates financial market headline risks, but shouldn’t derail economic growth.
The Markets
• Corporate earnings should be strong in 2021, and we expect stock prices to advance modestly.
• Equity market leadership could shift toward value, small and non-U.S. stocks
• Long-term returns across asset classes could be lower than many expect, which will require diligent research and careful selectivity.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.