Gordon Pape: Why I see muted upside for investors in 2021

Farewell to 2020. It’s a year we’d all like to forget, but never will. Normalcy as we knew it vanished. Work, education, socializing, shopping – all changed dramatically.

But we all know that story by now. The key is what lies ahead. Will 2021 bring a return to the life we knew before COVID? Or are there more unpleasant surprises to come?

We’ll look at that in a moment but first let’s finally close the book on 2020. From an investing perspective, it was a surprisingly decent year, even factoring in the February-March stock market meltdown. Here’s how the major North American indexes performed.

Nasdaq Composite: Up 42.6 per cent. Tech stocks comprise the largest portion of this index and they were the major beneficiaries of the effects of the pandemic. Amazon, Apple Inc., Shopify Inc., and Netflix Inc. were among the leaders, but Tesla Inc. outdid them all in terms of total returns.

S&P 500: Up 16.3 per cent. The major tech companies are also in the S&P 500 but they only account for 27.6 per cent of total assets. So, their impact on returns was more muted.

Dow Jones Industrial Average: Up 7.25 per cent. Old economy stocks didn’t fare as well in 2020. The Dow posted a modest gain but ran well behind the tech-dominated Nasdaq.

S&P/TSX Composite: Up 2.2 per cent. Canada was the laggard, with the TSX dragged down by energy stocks (down 37.65 per cent for the year). Financials, the largest single component of the Composite, were down about 3 per cent.

We saw a strong performance from bonds, with the FTSE Universe Bond Index up 8.58 per cent for 2020, reflecting the deep rate cuts by central banks. The Long-Term Bond Index was up 11.9 per cent. From a Canadian investor’s perspective, it was better having more of your money in the bond market than in TSX stocks.

So, now what? I’d like to join the broad chorus of optimists and predict a terrific year for stocks in 2021 as we pull out of the pandemic. But I think the markets have already priced in a broad economic recovery. With valuations so stretched, I see a more muted upside for 2021. Uncertainty in Washington as the Biden administration takes hold will contribute to investor caution.

Overall, I think we’ll see gains as the widespread distribution of vaccines feeds investor confidence. But stock market advances are likely to be less impressive than some analysts expect. Here’s my outlook.

Tech will slow

We saw huge gains in information technology companies last year as demand for in-home entertainment and communications surged. Some companies saw their share prices more than double, including Ottawa-based Shopify. These companies will continue to grow but price gains of that magnitude are not sustainable. Look for Nasdaq growth in the 10-15-per-cent range.

The Dow will rebound

Dow stocks started showing strength late in the year, with the index gaining 15.5 per cent between Oct. 31 and the end of December. Companies such as Walmart Inc., Disney Co., Apple Inc., Microsoft Corp., Visa Inc., Boeing Co., and Home Depot Inc. should provide boosts. Look for a gain in the 12-per-cent range.

The TSX will do better

Fossil fuel stocks won’t repeat the disastrous decline of 2020. Financials are already improving. The REIT sector is recovering. Utilities should post modest gains. Overall target gain: 8-10 per cent.

Green energy companies will continue to prosper

These stocks did remarkably well in 2020. Some analysts feel they are running ahead of themselves at this point. That’s true in some cases, but new stimulus from the Biden administration should encourage more investment and drive share prices higher. Of course, this is contingent on a co-operative Congress. Tuesday’s run-off Senatorial elections in Georgia will decide that.

Bond prices will weaken

Bonds surprised last year because the central banks made deep interest rate cuts to bolster the faltering economy. That’s not likely to happen this year, unless the Fed finds itself in a situation where it feels negative rates are the only answer. I can think of only two things that might prompt such a move: a major war or the emergence of a vaccine-resistant strain of the coronavirus. Hopefully, neither will happen.

Overall, I am cautiously optimistic about 2021. Portfolio weightings in cash and, especially, bonds should be reduced. Stocks should be given priority, especially those that are economically sensitive.