2021 Investment Advice
Today, most of us are happy to put 2020 behind us. In the past, my blog has focused on the stock market technical factors like price-earnings ratios, book value, and financial jargons that often confused most of my readers. So in order, I will keep things more simple. My blogs will focus on the psychological aspects of the market and the U.S. economy.
Presently, the economic recovery looks unclear because of the recent Presidential election and changing to a new administration, and distributing new COVID-19 vaccines. We are at a transition point because we do not know the new administration's policies and the impact of the COVID-19 vaccine's effect on herd immunity.
According to Howard Marks, founder of Oaktree Capital, he still believes in controlling the virus for a real economic turnaround. The pandemic has a traumatic impact on employment over the next 5 to 7 years. Many small businesses will not return as unemployment claims continue to range around 800,000 per week. Let me remind everyone it took ten years to recover from the 2008 melt-down to a full-employment economy. I want to caution the readers that the recent stock market is not a reflection of the U.S. economic recovery.
Morningstar reports on their 2021 first-quarter forecast that the economy will start to recovery mid-year 2021 primary based on the COVID-19 distribution effort and possibly more government spending support. The economy will get to some degree of normalcy in the 4th quarter of 2021 or the 1st quarter of 2022. The timing of recovery will depend on Congress ending its dysfunctional behavior and the effectiveness of the vaccine distribution.
THE STOCK MARKET
The American Association of Individual Investor sentiment poll indicates optimism among individual investors about the short-term direction of the stock market declined but remained unusually high. Pessimism rebounded, while neutral sentiment decreased. Bullish sentiment, expectations that stock prices will rise over the next six months, fell 1.0 percentage points to 48.1%. Optimism is above its historical average of 38.0% for the fifth consecutive week.
However, the CNN Greed/Fear weekly indicator overall reports a high level of greed. Morningstar this morning reported that they think the market valuation is overvalued by 8%, which means there are not many investments to make money. Our review of the 14 most popular Vanguard funds does confirm the Morningstar review that the market is full of volatility for the near future, as Howard Mark's of Oaktree Capital stated in his 4th quarter newsletter. "The odds aren't on the investor's side, and the market is vulnerable to negative surprises." For my clients' I remain cautious for the 1st half of 2021 and stay prudent in adding more of their dollars into the market.