2021 Outlook Summary: Out of the Darkness

RiverFront places a high probability of positive market returns in 2021

2021 Outlook Summary: Out of the Darkness


  • RiverFront is optimistic on stocks in 2021.
  • We recognize ongoing challenges related to COVID-19.
  • We think massive policy stimulus will win out, as it did in 2020.

2020 was a dark year by almost any standard imaginable. Riverfront’s Outlook theme for 2021 is Out of the Darkness, which references not only the renewed optimism society is placing on a vaccine for COVID-19, but also the emergence of what we believe is a new positive economic and market cycle. RiverFront places a high probability on positive market returns next year.

With the idea that ‘a picture is worth a thousand words’, this year we evolved our Outlook into a more visual format in order to make it easier to digest. In that spirit, this Weekly View, a summary of our Outlook, which Financial Advisors can find here, will also focus on the powerful story that charts can tell us about the potential for the economy and markets for 2021.

RiverFront is Optimistic about 2021

Our base case scenario sees US growth rebounding in 2021, due to widespread vaccine distribution, a Federal Reserve willing to stay accommodative, and policymakers setting aside differences long enough to come to the aid of hard-hit industries, small businesses and the unemployed. Under this scenario we believe corporate earnings will rebound strongly from 2020 levels, inflation and bond yields will gradually rise but stay range-bound, and the US dollar will likely continue its recent downtrend.

The table above depicts RiverFront’s predictions for 2021 using three scenarios (Pessimistic (Bear), Base, and Optimistic (Bull)). Our assessment of each scenario’s probability is also shown. The assessment is based on RiverFront’s Investment team’s views and opinions as of 12.15.20. Each case is hypothetical and is not based on actual investor experience. These views are subject to change and are not intended as investment recommendations. There is no representation that an investor will or is likely to achieve positive returns, avoid losses or experience returns as discussed for various market classes. See disclosures for additional definitions. *H1 = first half of a calendar year.

Pandemic Lockdown Forces Unprecedented Stimulus

  • The US economy collapsed in Q2 of 2020, as result of the pandemic lockdown.
  • This forced policymakers into the largest combined monetary and fiscal stimulus in modern history.
  • Money supply is growing rapidly everywhere in the world, and particularly in the US.
  • We believe this is the catalyst to usher in an economic cycle…and a very positive backdrop for the stock market.
Source: Refinitiv Datastream, RiverFront; data monthly; last data release 10.01.20. Chart shown for illustrative purposes only. M2 = cash and checking deposits, savings deposits, money market securities, mutual funds, and other time deposits.

A New Economic Cycle Emerges

  • While earnings on many public companies suffered, Q3 of 2020 saw record highs in broader measures of US corporate profit and net cash flow.
  • Combined with strong small business and manufacturing sentiment, the data suggests to us that the US economy is in a new cyclical upturn.
  • We expect the US economy to resume its pre-COVID-19 upward path by the 2nd half of 2021, but with more accommodative policy to help gird it.
Source: Refinitiv Datastream, RiverFront; data quarterly. Data as of 09.30.2020. Chart shown for illustrative purposes only. The US Corporate Profits measure—profits from current production—is the income that arises from current production, measured before income taxes, of organizations treated as corporations in the national income and product accounts (NIPAS). With several differences, this income is measured as receipts less expenses as defined in Federal tax law. Net cash flow with Industrial Value Added is equal to undistributed corporate profits with certain accounting adjustments, plus consumption of corporate fixed capital less capital transfers paid (net). It is a profits-related measure of internal funds available for investment.

Despite Strong Run, Valuation Still Reasonable Relative to Risk-Free Rates

  • The difference between the expected earnings yield on the S&P 500 on 12 month-forward earnings and the 10-year treasury is +3.6 percentage points (green line).
  • Dividend yields are also greater than treasury yields (blue line), suggesting equities provide what we see as attractive income potential over ‘risk-free’ alternatives, particularly compared to the ‘peak-market’ times of the late 1990s or mid-2000s (shaded areas).
Source: Refinitiv Datastream, RiverFront; data weekly, as of 12.3.2020. Chart shown for illustrative purposes only. ‘Risk-Free’ rate is the theoretical rate of return of an investment with zero risk, which we define by using the 10-yr US Treasury Yield. Past Performance is no guarantee of future results.

US Dollar: New Downtrend Forming?

  • We expect the US dollar (USD) to remain in a weakening trend for 2021.
  • There are both US-centric reasons (larger deficit and money supply), as well as international reasons (improving global growth) for this to continue.
  • This is good news for US exporters, though it may create some inflation for US consumers (oil, imported goods). We also view USD weakness as generally positive for US investors in international stocks.
Source: Refinitiv Datastream, RiverFront; data monthly, as of Nov. 2020. Chart shown for illustrative purposes only. You cannot invest directly in an index. See disclosures for index definitions. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Past performance is no guarantee of future results.

Conclusion: Portfolio Positioning Reflects Our Optimism

We are optimistic on stocks despite the potential for inflation, overly optimistic investor sentiment, unsettled politics, and virus mutation currently occurring in Europe. We think these concerns will be more than offset in ’21 by the positive backdrop of unprecedented stimulus, as was the case in 2020.

In light of this view, we continue to favor stocks over bonds, and prefer a mixture of US stable earnings growers with cyclical themes. We see companies in the software and data warehousing industries as two examples of stable earnings growers. Infrastructure companies and companies servicing the US consumer are the types of companies that we anticipate benefiting from an upturn in the economic cycle. We believe international stocks remain fundamentally challenged but tactically attractive due to rebounding global growth, particularly in emerging economies, and the potential for currency tailwinds.