A Comment -- General Comments From an Expert (A Commentary)

Economists say we'll see how bad things really are in January - March 2021. He agrees. People don't know what to expect coming out of the holiday season. First quarter will be difficult, second one will be slightly better. Third and fourth quarters should be substantially better with pent-up demand for travel, restaurants, and retail. Implication for capital markets is anyone's guess. Interest rates will certainly remain low, even if we see inflation. Long end of the bond market may creep up, but the short end will stay where it is. Equity markets will see some volatility. Fiscal and monetary policy have changed dramatically, and the effects may not be seen for years. Working from home has changed consumer behaviour in ways that we don't know about. Commercial real estate may be difficult, but things like cloud computing and infrastructure have done well and will continue to do so. Companies that did well in 2020 will continue to do well in 2021. A bad business will continue to be bad in 2021.

What's in your crystal ball for 2021? Tech is the best performing sector in the S&P 500, up just shy of 40%. He's a bit concerned that the market is over its skis. In 2021, he likes large cap, growth at a reasonable price (GARP) names. MSFT, Ericsson, Nvidia, Alibaba, all leaders in the accelerated move to the cloud. Likes semiconductors like Micron, and e-commerce leaders like PayPal and Shopify. Has also identified the themes and trends of robotics and gaming, electrification, 5G deployment, digital twins, and AI.

Volatility for 2021, and how are you positioned? Near term, volatility and vulnerability to the downside for the market. Valuations are being compared to 1999-2000. Sinking yields, IPOs, frenzy of call options, merger mania, and digital tulips like Bitcoin. He's 93% invested across a couple of dozen tech vendors and end users. He also has a short equity indices hedge, which is quite high at 70%. Protect on the downside, and smooth out the volatility. Have a safety net.

What's keeping you up at night? A neutral position on a hedge is about 25%. Now we're at 70%. Probability of markets being lower rather than higher is significant. His models are indicating vulnerability to the downside.

What to hold in a correction? Core areas are cloud, semiconductors, and software application. These are the ones with the longest runway, so he will continue to hold them in a correction.

2021 outlook The Year of the Vaccine and a return to a new normal. Economic growth will happen globally, including an uptick in bond yields. This will be the end of a 40-year bull run for investment-grade bonds. Investors will need to look elsewhere for returns. In stocks, PE ratios expanded in 2020, but investors will focus on valuation in 2021, much different than this year. It's unlikely big tech will perform as well in 2021; don't expect the same big returns. In Canada and worldwide, expect a steepening yield curve which will benefit the big banks and insurers. Telcos and pipelines will raise dividends.

A retired senior holds a Royal Bank 3.1% bond and Canadian stocks. Hang onto the bond? The 3.1% yield is much higher than today, so you probably have a capital gain on this. This could offer diversification to your portfolio. nothing wrong with holding onto this, offering you protection. But ask, how does it fit into your whole portfolio? What asset allocation works for you?

What bond ETF pays a high yield? Most of these trade in the US in US dollars. Expect more volatility in these high-yield bonds. He won't favour one ETF company over another, but favour one that favour currency exposure, meaning that if the USD declines, you won't suffer a negative decline. He can't predict currencies.

Market. Over heating and froth does not necessarily point to a bear market. We have had 19 companies that more than doubled on their opening day after an IPO. We have not seen this since the tech bubble. The high valuations can point to a lot of downside when the bubble finally collapses. Governments are standing by with stimulus. We are at risk of a major sell off after the pandemic. But some factors are looking positive, such as an improving economy. The most optimistic trade is that the recession we had this year is a shock-to-the-system type of recession and typically have a lot of pent up demand released into the economy. At present, though we have further lockdowns announced, and we hear news of a new strains. We are not out of the woods yet.

January selling? Will re-balancing portfolios cause a selling off of some FANG stocks? He does not think there will be a lot of tax loss selling and January selling he does not think will move share prices.

The new strain from the UK underscores the hope that the markets have formed under the presumption of the vaccine and government aid. There are real growth challenges and it is not a surprise to see set backs. The markets are really over valued, but he is unsure if we will get to fair market value without a major policy mistake. Central Banks must continue stimulus.

There are still 20M people receiving benefits in the US. There is more stimulus coming but it will not pass until the new congress, probably in February.