Cautious optimism in the year ahead

On December 9, 2020, TIAA presented a live webinar hosted by TIAA Wealth Management Advisor Yanelys Benham, CFP®, featuring insights from Brian Nick, CAIA®, Chief Investment Strategist, Nuveen. Nick addressed what the election results and ongoing pandemic mean for investors, where bright spots may emerge for the markets and economy and ways to optimize your planning in the year ahead. Below are key highlights from the webinar. To access the full, recorded webinar, click here .

Putting 2020 in the rear-view mirror

While a global pandemic, economic recession and contentious election created a perfect storm in 2020, not all news was bad. According to Nick, every major asset class has delivered positive returns, and the more volatile parts of the financial market generally compensated investors with superior returns.
Investors remain confident that the markets will continue on an upward trajectory, supported by fundamentals like economic growth and corporate profits. However, Nick cautions that while the markets can price in a post-COVID world by pulling forward good news about vaccines, the economy can’t heal until the end of the pandemic becomes a reality.
  • The markets continue to be led by U.S. stocks, mainly those best positioned for the current environment, including tech, online shopping and consumer goods.
  • While stocks and bonds rallied together this year, cash has been the worst performer since the stock market bottom in March.
  • The world has bounced back nicely from the recession even as the pandemic continues to rage, but a full recovery will take longer and require government support.
  • Europe’s recession was worse because the economic lockdown was stricter. However, its bounce was also higher in the third quarter.
  • The United States had a shallower V-shaped downturn and recovery because it did not lock down its economy as strictly.
  • A mature expansion is already forming in China, which had the earliest recession and earliest recovery, providing a boost to other economies in the region and around the world.

Hope on the horizon

Welcome news of multiple successful vaccine trials solidified expectations that a large percentage of the world’s population may be vaccinated by the second half of 2021. However, Nick noted, the vaccine doesn’t help now, as the virus continues to severely depress parts of the economy.
"This is an unusual shape for a recovery,"  Nick noted. "It speaks to how external the shock was and how dependent the recovery remains on aid from the government. If we all got vaccinated today or something else happened to make us all feel perfectly safe, the economy would come back like a rocket."

  • While the V-shaped part of the recovery is over, the U.S. economic recovery is on track.
  • Housing, manufacturing and consumer spending are strong. However, exports and business investment are down as companies proceed with caution.
  • Government spending is also adding less, but consumers are proving resilient and adaptable.
  • We’re looking at slower growth this quarter and next until more stimulus, plus a vaccine next year, provide another boost.

Women and service workers are disproportionately impacted

While it’s reassuring that the economy is poised to rebound quickly once we solve for the virus, American workers are faring very differently depending on their jobs, gender and income levels.
  • Unemployed workers were able to amass significant savings during the spring, which is helping them now. However, it appears that the big fiscal relief package we expected this year will get pushed into next year.
  • While the temporary layoffs experienced during the initial virus wave in April have largely reversed, more workers are being permanently let go as more businesses fail and certain industries are still down by more than half of their prior revenue.
  • Female labor force participation has dropped more than male participation, especially among married women, primarily due to schools being closed to in-person learning.
  • Wage growth for low-skilled workers fell this year after accelerating in prior years. This is not a problem that we’re seeing in the rest of the world, which has produced more effective job and income support programs than the United States.
  • Getting low-skill wage growth back on par with what higher-skilled workers are receiving is a clear goal of the Federal Reserve ("the Fed").

Consumer confidence helps buoy financial markets

Since we’re not seeing the same loss of wealth in today’s economy that we saw during the Great Recession, the stock market and consumer confidence have remained strong. Spending growth has been the highest on record as consumers turn to online retailers to purchase essential goods. However, overall consumer spending is still down due to the pandemic.
  • On average, households are on solid ground. Savings rates are high. Household net worth healed quickly thanks to the quick stock market rebound and rising home prices.
  • While government support is largely gone, it continues to have a positive impact on household balance sheets, consumer confidence and spending.
  • While we’re in the beginning of a new bull market, stock valuations are actually higher today than they were before the pandemic, by a considerable margin.
  • The Fed acted quickly to ease financial conditions early in the year, which helped to ensure the financial markets continued to function.
  • Corporate bond borrowing has become easier, and the U.S. dollar has generally weakened. These are all signs of looser financial conditions.

Seeking value in the months ahead

Interest rates are expected to remain low for an extended period, which will impact many investors’ ability to generate income from their investment portfolios. Bonds have adjusted accordingly, including corporate bonds, municipal bonds, Treasury inflation-protected securities (TIPS) and anything else with a significant yield component.
  • Currently, all asset classes look expensive. Investors will need to lower their expectations for what’s possible to earn from a portfolio over the balance of the decade.
  • This means that going with what has worked in the past isn’t going to produce the same results moving forward.
  • A small number of companies and sectors have been responsible for the bulk of the performance we’ve seen this year in the equity markets. The assumption going forward is that these companies will continue to have good operating models and strong revenues and profits, but they won't necessarily be responsible for as much of the performance.
  • Investors seeking to manage portfolio risk in the months ahead should consider an approach emphasizing broad diversification across countries and asset classes.

Impact of the election

"Historically, we don’t find much evidence that the party of the president has driven markets in any significant way," Nick said. "However, valuation does explain about half of the variation of returns in presidents’ first terms. So pay attention to how the markets are valued when a president takes office."
  • The timing, effectiveness and adoption of a vaccine in 2021 will be the main market driver, not policies coming out of Washington, D.C.
  • That’s even more true if we have a divided government, which tends to produce more modest policy outcomes.
  • Policy changes and legislation can take months or even years to become law, which is why election outcomes are rarely long-term drivers of the financial markets.

What can you expect in the year ahead?

Nick provided his base case, as well as upside and downside scenarios for the markets and economy in 2021.
Base case:
  • The most likely scenario is that the global economy will bounce back from its 2020 contraction. However, more businesses could close, and more workers lose jobs while we wait for a vaccine to be distributed.
  • We expect corporate profits to surge after a down year, easing pressure on stock valuations.
  • Interest rates and inflation are expected to remain low for the next several years.
Upside case:
  • An early, effective and widely adopted vaccine would bring the economy back to normal faster.
  • We could also see the U.S. unemployment rate decline rapidly to below 5% and the global economy hit its prior peak sooner.
  • Inflation could become a “problem” for central banks and interest rates could rise.
Downside case:
  • A lack of fiscal relief in the fourth quarter 2020 would create a much steeper climb for the economy. A surge in coronavirus cases and hospitalizations could lead to government-mandated lockdowns in the United States and the eurozone, further delaying the economic recovery.
  • Fears of rising tax rates and increased regulation could dampen investors’ risk appetite if Democrats were to win both races in next month’s Georgia Senate runoff, capturing a majority in the Senate next year.
  • That’s possible but unlikely, and even if it were to occur, they would only have the slimmest of majorities to pass sweeping legislative changes next year.
Benham concluded the webinar by reminding attendees about some of the valuable financial lessons learned in 2020, and why they remain relevant as we move forward into the new year. These include:
  • The importance of ongoing access to advice from a financial professional.
  • Putting a plan in place to help weather changing conditions.
  • Creating a dependable income floor by combining different lifetime income sources.
  • Continuing to build emergency cash reserves.
  • Ensuring your investment strategy is aligned with your risk profile, time frame and goals to help avoid behaviors that can derail your plan, such as chasing returns or emotional decision making.
"If we learned nothing else from 2020, it’s that circumstances can change rapidly," Benham said. "That’s why having a plan in place is so important. A plan can help you weather any obstacles in your path and help keep you on course toward your important financial goals."
If you’re thinking about putting a plan in place for the new year, now is a great time to get a jump on your resolution. Your TIAA advisor is here and ready to help you work through any concerns so you can make the decisions that are right for you and your family.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any
particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

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