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Here are Wall Street forecasts for 2021 that stand apart from the crowd

MarketWatch logo MarketWatch 12/26/2020 Mark Hulbert
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To make the most of the year-ahead stock market forecasts that are popular in December, there are several important things to remember.

Keep those things in mind as you focus on Wall Street research departments’ 2021 forecasts. I devote a monthly column on the latest Wall Street research, and that is this month’s focus. A month ago, I focused on the rotation of the market away from the FAAMNG stocks.

Let me start by reviewing the consensus outlook for 2021 among the Wall Street research departments I monitor: The economy and corporate earnings will rebound sharply, with interest rates and inflation nevertheless remaining low. The stock market will produce returns in line with its long-term historical average of around 10% — equivalent to year-end 2021 levels of above 33,000 points and 4,000 for the Dow Jones Industrial Average and S&P 500 respectively. Value will begin to outperform growth — finally — as the economy surges.

Given how widespread this consensus is, there’s no point in reviewing the myriad firms’ recapitulation of it. My eyes glazed over after reading the first dozen forecasts all more or less saying the same thing.

Instead, I will focus on some of the more significant deviations from the consensus:

Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, author of the classic “Stocks for the Long Run” and a senior investment strategy advisor to Wisdom Tree Funds, predicts that we will see much more significant inflation for the next few years than we have seen over the last two decades.” Though Siegel does not forecast where inflation will be at the end of 2021 in particular, he says: “I would not be surprised to see 3% to 5% inflation over the next several years.”

BlackRock, the global investment firm with over $2 trillion in assets under management, and which also owns the iShares franchise, agrees with Siegel that inflation will be higher than what the Wall Street consensus is expecting. The firm is projecting inflation of around 2.5% to 3% annualized. “History suggests inflation risk is highest when low-inflation conviction is the strongest — and the view is entrenched in intellectual and policy frameworks.”


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Neither Siegel nor BlackRock believe that this higher-than-expected inflation will sabotage the bull market in stocks. BlackRock, for example, believes that the Fed will keep interest rates low despite rising inflation, resulting in lower real interest rates. That should support continued high equity valuations, in their opinion.

LPL Financial Holdings thinks Wall Street is not fully appreciating the risk of a double-dip recession. “We think the odds of a potential double-dip recession … may increase as we move into 2022. Recessions are necessary to flush out the excesses. Given [that] many industries and people haven’t felt this latest recession, that flushing process didn’t fully take place this time around, making this recession atypical — and opening the possibility of another short-lived recession down the road.”

The firm continued: “The length of this [most recent] recession — we think about six months — was also unusual. The previous shortest recession ever was six months in the early 1980s, which was followed by a weak expansion and then a double-dip recession starting about a year later. Historically, the average recession has lasted about one year, which suggests perhaps more time may have been needed for the economy to properly reset.”

Note carefully that, since the stock market discounts imminent recessions by an average of six to nine months, a double-dip recession in 2022 would be expected to translate into stock market weakness at some point in 2021. Nevertheless, LPL Financial’s S&P 500 target for year-end 2021 is 3,850 to 3,900 points — only slightly lower than the Wall Street consensus.

Not all Wall Street research departments are bullish on stocks, I hasten to add. But those who are typically don’t hazard a forecast for 2021, focusing instead on the longer-term. Vanguard, for example, the mutual fund powerhouse, is projecting that U.S. equities over the next decade will produce returns that are roughly half of what their historical average has been up to this point. Specifically, they’re projecting annualized returns in the 3.5% to 6% range.

Two other well-known firms, GMO and Research Affiliates, are even more bearish. GMO is projecting seven-year annualized returns for U.S. equities of 5.2% annualized below inflation. Research Affiliates is forecasting an after-inflation annualized return over the next decade of minus 0.1%.

The normal pattern, as the economy emerges from recession, is for value to outperform growth. But BlackRock is skeptical: “We have entered a new investment order. The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate. … The traditional business cycle playbook does not apply to the pandemic.” For that reason, the firm is merely neutral on value versus growth: “The [value] factor could benefit from an accelerated restart [of the economy], but we believe that many of the cheapest companies — across a range of sectors — face structural challenges that have been exacerbated by the pandemic.”

LPL Financial also is not ready to give up on growth stocks. Consistent with the greater probability they’re giving to a double-dip recession, they think growth stocks will continue to dominate until “the economy makes additional progress toward a return to normal.” Only then do they “expect participation in this young bull market to broaden and potentially help boost some of the more economically sensitive laggards on the value-style side.”

Yet another perspective on the growth-versus-value debate is that it doesn’t mean what it used to. Nicholas Colas and Jessica Rabe, co-founders of the DataTrek Community, recently wrote that the distinction has “lost a lot of … meaning over the years as almost entire sectors move into one bucket or the other.” For example, in the large-cap arena, they favor growth over value because the two most dominant sectors in the value bucket — health care and financials — are, in their opinion, either fully valued or worse.

In the small-cap sector, in contrast, they are agnostic between value and growth, since nearly half of the small-cap value sector is in financials/real estate while a third of the growth sector is in health care.

“We’re not even sure what purpose these designations [growth and value] even have anymore.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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