What's going on?
Economists’ optimistic predictions are music to investors’ ears: they think there’s an over 70% chance stocks will be all-singing and all-dancing next year (tweet this).
What does this mean?
A pick-up in the economy should create a healthier environment for share prices going forward – especially cheap-looking “value” stocks and “cyclicals”, whose fortunes rise and fall with economic growth. And while company profits themselves might take a while to recover from this year’s slump, Goldman Sachs argues that profit growth should – just like it has after past recessions – rebound strongly, spelling good news for stock prices.
Commodities should do well too: a bump in demand for things like oil and copper could outstrip supply and push up prices. And with central banks’ bond-buying programs showing no signs of letting up, there’s not much to suggest bond prices will collapse any time soon either.
Why should I care?
For you personally: Easy pickings.
Just as the biggest tech stocks almost single-handedly drove this year’s rising US stock market, a positive outlook doesn’t necessarily mean stocks and bonds will climb across the board. So as you set out your stall for 2021, you might find you’re better off investing in exchange-traded funds that track a basket of, say, cyclical or value stocks, rather than buying into individual assets. That way you stand to benefit from wholesale rises without risking it all on one or two big names.
The bigger picture: What goes up doesn’t have to come down.
Stocks tend to see a particular pattern during economic recoveries: an initial bounceback where everything heads in the same direction, and then rises and falls based on a company’s individual merits (or “fundamentals”). Plenty of firms, then, could do well in the short-term, but the ones that are able to grow their earnings might really set themselves apart from the crowd…