Yes. 2021 has the potential to be a very interesting year for a host of reasons. First, the risks and uncertainties:
- Covid-19 – We just don’t know how quickly the majority of people will get vaccinated and subsequently get back to a more normal existence. In addition, there are unknowns in terms of new variants and the effect they will have on the number of infections and severity of illness. Most are assuming that some semblance of normalcy will return for the second part of this year, but we just don’t know how the course of events will play out between now and then or how human behaviors will change even if the threat of Covid is largely behind us at that point.
- What will happen with respect to the near 20 million people who are currently unemployed and in need of government assistance? How many of these people will find work in the coming months as the economy attempts to recover?
- As we’ve written about, the re-acceleration in both economic growth and inflation has momentum from base-effects through the first half of this year; it will be easier to grow as we progress to that point from where we were a year ago. By about mid-year though, that tailwind switches directions and has a dampening effect on growth and inflation. Comparisons become more difficult which means that all else being equal, growth and inflation should slow, and in turn provide less support for financial markets; which like a boulder perched toward the top of a steep hill, need all the support they can get.
Now the positive:
- Commodities are very cheap relative to financial assets and provide an alternative. The accelerating growth and inflation cycles in the first half of the year should be supportive of commodities broadly speaking just as they have been over the last few months.
- So long as one isn’t overly exposed to the financial assets that are most overvalued at the wrong point in the cycles (most likely mid-year based on what we see at the moment), and has exposure to those asset classes that hold up relatively better in decelerating cycles, there’s a good chance risk can be managed and losses mitigated if financial markets get messy. As seasoned investors know, the goal in down markets isn’t to avoid losses entirely, but to lose less and preserve as much capital as possible so that one can take advantage of subsequent opportunities. With good management of the cycle, asset class selection, and risk management, there’s no reason to believe 2021 can’t be a successful year.
Editors Note: This article was originally published in the February 2021 edition of our “Cadence Clips” newsletter.
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