Now that 2020 is in the rear view mirror, and we know with certainty the outcomes in Washington, how can it impact your investment strategies for the new year? The good news is there are many reasons we can be hopeful that 2021 is pointing in the right direction. Some key indications include:
- The market is responding well to the vaccine rollout and the change in regime
- The Fed still wants to be accommodative and we'll likely see additional stimulus that should directly benefit nonprofit organizations
- Donors have been supportive and this backdrop ought to allow their generosity to continue
- There's still some slack in the economy leaving room for growth, yet inflation is not an immediate threat, even with some short term increases expected as the penned up demand for certain goods and services begins to unleash
Playing out the scenarios for 2021
Like any new development, various outcomes are possible. In our current situation, the base case is a “reflationary” environment. That means we should see major economies achieve COVID immunity by the end of the year, social and business activity normalizes in the second half of the year, unemployment eventually falls, and inflation starts to move toward the Federal Reserve’s (Fed) target of 2%. Even better, the upside surprise would be achieving these milestones sooner. Worst case, and the less likely downside scenario, could result from the slowing of the vaccines immunity success and business and social activity remaining hampered. In a deeper dive, our Chief Economist, Jim Solloway, reviews his economic forecast coupled with insightful humor, Economic Outlook: The World get a Shot in the Arm.
Planning your Nonprofit Investment Strategies
What does this mean for your investment strategies? Taking these broader predications to the next level, we can take a closer look at how they may apply to the nonprofit investor.
- Investment Grade Fixed Income: We are unlikely to see the 7.5% type returns of the Bloomberg Barclays US Aggregate Index in 2020 with the Fed making it well known they want to anchor short term rates well into next year or beyond. That means investors clip the coupons of bonds they hold and seek to minimize price deterioration and may still get cost effective risk mitigation if there is a flight to quality.
- Emerging Markets Debt: If local currencies benefit from a weakening dollar and rising commodities, and higher yielding bonds should benefit as defaults are expected to slow from 2020 levels and investors continue their quest for yield.
- Equities: US equities have been very strong, but the devil is in the details. Most of the stars of 2020 were in a few names that greatly benefited from the pandemic and involved technology and more people working from home. There may now be more room for the other 495 stocks of the S&P 500 to shine. Value names, which have been long lagging their growth counterparts for years, are likely starting to finally see the tide turning. While it is never a straight trajectory, it can give more upside opportunity in sectors like financials, real estate and the badly beaten energy stocks.
- Global Equities: A growing economy is often positive for emerging countries and even in developed areas, like the U.K., we have seen less volatility and relative to the US, even more chance of the opportunity of buying low.
Looking at what has changed and how we survived through troubled times gives us the benefit of experience. Difficult roads often lead to beautiful destinations. Let's hope 2021 is a much lovelier ride.
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The Bloomberg Barclays US Aggregate Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.
The S&P 500® Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly-traded U.S.companies and is considered representative of the broad U.S. stock market.
Index returns are for illustrative purposes only and do not represent actual investment performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
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