Liz Ann Sonders, chief market strategist at Charles Schwab, voices concern that temporary layoffs could become permanent. Even before the pandemic, one of the biggest fears among labor economists was that artificial intelligence and robotics would result in the elimination of more than 20 million jobs over the next two decades. By all accounts, Covid-19 has accelerated the journey to a digital future.
If the U.S. manages to sustain a growth rate of 2.5% during the 2020s, most people would view that as an improvement over the previous two decades. But does it justify a Shiller CAPE (cyclically adjusted PE ratio) of 33 or 34? Many advisors and asset managers question that price level and are looking elsewhere. Rajiv Jain, CEO and CIO of GQG Partners, says “valuation sensitivity should be far greater today” than at any time in recent memory.
Contrarian Views
Few years have witnessed such a wide dispersion among different investment sectors within the S&P 500 as 2020 did, according to DoubleLine CEO and CIO Jeffrey Gundlach. Information technology was up 43.9% while energy fell 33.7%. Like many observers, he believes technology’s long run of market supremacy is coming to an end.
Another related area of dispute is what happens to inflation. Even with all the fiscal and monetary stimulus, many observers still think inflation is permanently dead. The inflation consensus is 2%, “but I’ll bet it’s higher,” says Richard Bernstein, CEO and CIO of the asset management firm bearing his name.
It’s a major issue for vulnerable long-duration assets, like technology companies and venture capital-backed businesses, not to mention long-term bonds. “Tech investors should be worried about a bubble,” Bernstein warns.
Pensions and endowments are worried about inflation, yet they are “investing in venture capital,” he continues. “That makes no sense.”
Value investors are hoping for the long drought for less expensive stocks to end. In a January webcast on value investing hosted by Ariel Investments, longtime equity manager Bill Miller of Miller Value Funds predicted “a consumption boom because people are pent-up and savings are so high.” Miller expects value to outperform growth “for at least a year” after the pandemic ends.
Some industries remain question marks. Another participant in the Ariel webcast, Artisan Partners’ Daniel O’Keefe, anticipates a boom in travel and leisure when the epidemic is over.
Business travel may have taken a permanent hit, but Bernstein isn’t so sure. The company that “makes the effort to see a customer will win the business, so [business travel] could partly rebound due to competition,” he says. Furthermore, the working-at-home trend could eventually be muted by “intra-company personnel competition.”
What unites many optimists and realists is the likelihood that the next decade will look very different from the last. Many leading strategists and portfolio managers contend that there is a bubble, but it is confined mainly to U.S. tech shares.
Shares of energy companies, retailers, banks, chemical concerns and companies in a host of other industries are hardly in bubble territory, Bernstein says. He’s not alone. Miller noted on the Ariel webcast that he is buying energy companies for the first time since the infamous 1986 oil bust.
A decade ago, Bernstein predicted U.S. investors were about to enjoy the greatest bull market of their lifetimes. For those who lived through the 1980s and 1990s, that seemed like a stretch. It doesn’t today.
Aside from Big Tech, which has gone sideways for six months now, it’s not that obvious where the traps are outside of businesses like retailing and hospitality, which have been directly harmed by the pandemic. The Leuthold Group’s Paulsen warns that defensive investments like utilities, gold and consumer staples could suffer a bout of serious underperformance. His research shows that when GDP is 4%, these sectors lag the S&P 500 by 12%.
When growth accelerates to 6%, the performance drag is closer to 23%. “Investors who thought they were responsible, cautious, defensive and avoiding the popular stocks could be subject to unexpected pain in 2021 due to a solid year of U.S. economic growth not experienced in decades,” Paulsen warns.
Jain doesn’t disagree, but he thinks the phenomenon Paulsen outlines accurately describes what transpired in the last nine months of 2020. Since March of last year, the S&P 500 had climbed more than 60% as of early January, and both utilities and consumer staples lagged the index by a lot more than 23%. Bernstein notes that if the economy is stronger than people think, consumer staples businesses may find it difficult to pass on input costs.