In this year’s write-up, I will review my 10-predictions for 2021. Clearly, anything can happen, but there is a point to this exercise, which helps me layout a game plan and thought process for the path that may lie ahead this coming year.
10) The global economy contracted in 2020 due to the coronavirus pandemic. But with a vaccine being rolled out, there is hope and optimism that the virus can be contained and controlled. It should lead to a better than expected GDP growth rate here in the US, approaching 5%.
9) Faster than expected GDP and lower comparables will give the illusion of higher inflation rates in the first half of 2021. However, the second half of 2021 will prove to be more challenging as inflation rates normalize and fall below the Fed’s long-run average rate of 2%.
8) Higher GDP growth and faster inflation rates will lead to higher 10-year yields in the first half of 2021. The yield will approach 1.5%, steepening the yield curve dramatically.
US Govt Bonds 10 Yr Yield Daily Chart
7) Higher Yields in the US, faster growth, and stronger inflation will result in the US dollar strengthening. After struggling below 91 on the dollar index in the first half of the year, it will rise back to 96 in the second half of 2021. The strong dollar will help to halt rising inflation in the second half of 2021.
DXY Daily Chart
6) Higher inflation rates in the first half of the year and fears over the dollar’s debasement will result in gold prices rising in the first half of 2021 to nearly $2,300, a record. However, as inflation normalizes, gold will retrace, and give back all of its gains and finish lower on the year.
5) Platinum may be the metal to watch as the auto sector recovers and production returns. It will result in higher demand for the metal as it is used in the catalytic converter and emission controls, and right now, it is the cheapest of its peers Palladium and Rhodium. It means that platinum soars to around $1,600.
Platinum Daily Chart
4) Rising rates will hurt the technology sector in the first half of 2021, as the sector has already seen a tremendous amount of multiple expansion due to the low rate. But rising rates mean that this sector’s valuation will be too high, resulting in lower equity valuation, before recovering by the end of the year.
3) Faster GDP Growth, higher inflation, and a steeper yield curve will make the traditional money center banks the best performing sector for the first half of 2021.
US 10Y – US 20Y Weekly Chart
2) Better than expected GDP, faster inflation, and higher bond yields will result in investors worrying that the Fed will raise rates much sooner than expected. The Fed will hold to its word and not raise rates in 2021 by calling the rising inflation rates as transitory, remaining committed to low rate and its bond-buying programs.
1) The S&P 500 will struggle in the first half of 2021, something nobody is expecting. Worries over Fed tightening or reduced bond purchases due to rising inflation and higher yields will contract the S&P 500 earnings multiple.
US S&P 500 Earnings Yield 10 Yr Rate
The S&P 500 earnings yield is currently around 5.25% based on 2022 earnings estimates. However, it will rise to 6%, its previous lows, sending the S&P 500 PE ratio to around 16 based on my 2022 earnings estimates of $193. This will send the S&P 500 back towards 3,050. However, as fears subside and inflation rates fall and return to below the Fed’s target, the S&P 500 will recover and finish the year higher at 3,860, a gain of over 4% for the year.Leave a comment