Twenty-twenty, That’s a wrap!

Casting an eye back over 2020 shows yet again that forecasting the future and hence the stock market is fraught with risk.

No matter how many times we were all warned by former Presidents, from George Bush Jnr to Obama and billionaire Ted-X speaker Bill Gates, none of us was prepared for the one-in-a-hundred-year event, a global pandemic.

COVID-19 lockdowns and economic shutdowns created the worst stock market crash since 1987, the deepest recessions (depressions) since the 1930s and the most massive monetary and fiscal stimulus Australia and the world has ever experienced.

March 23, 2020, offered the best buying opportunity in over a decade. To those readers who had the cash, grit and bravado to buy near or around the bottom, I take my hat off.

I took profits into the sell-off. Once the markets stabilised, thanks predominantly to the efforts of the US Federal Reserve to shore up the financial system, I was happy to start buying again in mid-April and May.

Share investing is not about being perfect, so missing the first 5-10% of share price rises from the bottom of the sell-off is better than not buying at all.

Although there is a lot of water under the bridge to come before economies return to anywhere near normal, pre-COVID, there is light at the end of the tunnel with three new COVID vaccines.

Share markets have responded in kind to the probable ‘V-shaped’ economic recovery scenario. The boost from the vaccine reflation of economic growth is creating a redirection of money flows out of the defensive, work-from-home stocks and some of the high-flying growth names.

Instead, investors are piling into travel stocks, airlines, banks, oil and gas shares, also what experts term the rotation trade, selling out of expensive ‘growth’ shares and into ‘value/cyclical’ shares.

We can’t ignore that 2020 has been a great year post-March for share investors. The ASX200 is up 45% from the March low.

Everyone has been in on the trade, including the younger generation – millennials and Gen Z are all fired up with low-cost trading platforms to try their luck at the wheel of stock market fortune.

Make no mistake, we are in the midst of a bull market. Why would anyone want to keep their cash in the bank, when share prices are rising like never before, and interest rates are so low?

You need not look any further than the outperformance of the small to mid-capitalisation shares compared to the larger ASX200 shares to see where the money has been flowing.

There is ‘hot money’, referring to the cash that chases down the latest best shares in the smaller companies and liquidity in bull markets is the driver of this type of investor behaviour.

As we head into the last few weeks of 2020, the music is still playing, and I see no signs of anyone wanting to leave the dance floor. The Australian share market looks well supported by higher iron-ore prices and the reflation trade (as a commodity-based economy, Australia benefits from higher economic growth).

The positive US election result, President Biden elect, and a current Republican-controlled senate (subject to the Georgia run-offs on January 5, 2021), an accommodative Federal Reserve of rates staying at record lows until 2023, all underpin some very bullish forecasts for the US stock market.

So, what could go wrong? As usual, we don’t know what we don’t know.

Some experts are concerned that the share market has run too hard, where low-interest rates and excess liquidity are solely driving returns.

Others are wary that a fast return to normal as the vaccine rollouts will take longer than the share markets expect.

Then there is the unlikely but possible win by two Democrat senators in the Georgia run-offs which would put the cat amidst the pigeons and split the Senate, giving Vice-President-elect Kamala Harris the casting vote to pass legislation.

This scenario would re-ignite fears of a super big-spending Biden Presidency, and spark panic of more debt bubbles.

And, of course, the China trade disputes and tariffs are lurking in the background, like unwanted flatulence.

All up, no one knows how 2021 will pan out.

The Shareplicity superannuation portfolio in Australia and the US is bar-belled with shares exposed to both secular (long-term) growth trends and some so-called value/cyclical plays.

There is some cash on hand to buy into a sell-off and an assumption that inflation is not going to upset the apple cart. Shares do well, with up to a 2-3% inflation rate, but any upticks in the 10-year US bond rate could cause some market volatility.

Longer-term Shareplicity remains bullish and positioned to hopefully benefit from a period of significant change and ongoing technological advancements. The trends such as the digital, e-commerce world with increasing contactless payments system as well as green technologies and EVs remain favourable sector picks for investors.

Thank you for being part of the Shareplicity journey, and I want to wish everyone a safe and happy holiday.

Shareplicity will be back in 2021 with a second book and lots more commentary.

 

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