2020 was a year of adversity, surprises, challenges and change. It saw pressure not seen in many years on institutions and political systems. In the midst of all this, the economy saw accelerating trends that have been putting significant pressure on certain sectors — a scenario that will continue into 2021. Overall, markets posted solid gains last year as monetary and fiscal stimulus was able to push valuations higher and overcome fundamental weakness.
The questions for market direction as we enter the new year are no more simple than the challenges we faced last year. The pandemic will continue to disrupt and significantly impact our lives at least through mid-year, if not beyond. Valuations for financial assets remain elevated, as they are being pushed higher by a zero-interest-rate policy that forces any growth to be valued with a significant premium. More stimulus will likely be pushed for after the change in presidential administration, only adding fuel to asset price expansion.
For the first part of the year, my expectation is looking very much like it did for the latter part of last year, with financial assets moving higher in price and yields remaining low with the yield curve steepening. Later in the year, I expect a reversal of these trends when interest rates start to climb, and the discussions around tax increases pick up momentum.
Disciplined asset allocation is critical in these types of markets. The market can continue to be highly valued for longer than expected, and a change in the environment can come swiftly for unexpected reasons.
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