Outlook 2021: How to prepare for the year ahead

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After a tumultuous 2020, these insights could help you position your investments for economic recovery.
While the past year shook the economy, the markets and our daily lives, and ultimately proved the resilience of all three, "2021 is shaping up as our gateway to a new frontier," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
While that post-pandemic frontier — a time of growth, innovation and relative stability — won't fully emerge until 2022, the year ahead should bring major progress on several fronts, Hyzy believes. Look for an economy moving into full recovery, ongoing growth in industries that thrived during the pandemic and a surge in pent-up demand for air travel and other services as society reopens.
Still, there will be risks for investors to navigate as well. "There are enough open questions about what's ahead to keep market volatility elevated, especially early in 2021," says Niladri Mukherjee, head of CIO Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. Below, Hyzy, Mukherjee and Marci McGregor, senior investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank, discuss what to expect in the year ahead and share ideas for how you could prepare. For more on the CIO's outlook for the year ahead, read The Gateway to the New Frontier (PDF).

A pandemic that (finally) loosens its grip

Promising vaccines heighten the chance the coronavirus will be contained in 2021, Hyzy says. Yet as the late-2020 spike in cases has reaffirmed, even in the best case the pandemic won't go quietly or easily. "We need to see constant improvement across all three major areas of the healthcare recovery," Hyzy says. "That means enhanced testing and access to testing, better treatments for people who have the disease and effective vaccines."
Investing implications: Though the outlook is positive, the likelihood of periodic volatility in 2021 underscores the importance of a disciplined investing process. Investors should focus on diversifying across and within different asset classes, as well as geographically, and rebalancing their portfolios as necessary, Hyzy says.
We need to see constant improvement in testing and access to testing, better treatments for people who have the disease and effective vaccines.
— Chris Hyzy,
Chief Investment Officer,
Merrill and Bank of America Private Bank

New stimulus gives a boost to consumer spending

"Consumers have been so resilient throughout this recovery and we think they will be a big factor driving growth in 2021," McGregor says. "They have a high savings rate and household net worth is at an all-time high." To maintain that momentum, the incoming Biden administration and a potentially split Congress (pending Georgia runoffs for two U.S. Senate seats in January) have strong incentives to overcome differences and work together, McGregor says. A major priority will be another fiscal stimulus package that could potentially provide between $500 billion and $1 trillion in spending and is likely to include additional aid for unemployed workers and small businesses, in particular.
Investing implications: Additional stimulus, combined with low interest rates and a subsiding pandemic, could unleash pent-up consumer demand in the second half of 2021 for service industries battered by the shutdowns. McGregor suggests looking for potential investment opportunities in areas that are most exposed to an improving economy.
Consumers have been so resilient throughout this recovery and we think they will be a big factor driving growth in 2021.
— Marci McGregor,
senior investment strategist, Chief Investment Office,
Merrill and Bank of America Private Bank

A more unified approach to trade tensions

During the past four years, as American tariffs and other trade policies roiled international commerce, many traditional U.S. allies were affected. Now, McGregor expects trade tensions with Europe, Mexico and Canada to subside, as the U.S. is poised to take a more multilateral approach to ongoing disputes with China over intellectual property, technology and environmental and climate issues.
Investing implications: One effect of that change will be an increasing focus on rerouting supply chains away from China. "Where the components for technology, healthcare equipment and pharmaceuticals are produced has become a national security issue," McGregor says. "For example, more than 90% of components for some drugs are manufactured in China." Efforts to alleviate that kind of dependence by switching to suppliers closer to home could mean a surge of new business for U.S. companies and help bring back manufacturing jobs for American workers, says McGregor.

Low interest rates and little inflation

Extraordinary efforts by the U.S. Federal Reserve helped keep markets functioning and businesses operating in 2020. Now, the Fed is expected to keep interest rates near zero for several years, even if inflation rises toward or past the Fed's 2% target rate, says Mukherjee. "All of the stimulus that has gone into the system is unlikely to lead to runaway inflation," he says. Indeed, the Fed could need to provide further help, increasing its bond purchases or taking other actions if the pace of recovery falters.
Investing implications: With yields on U.S. Treasurys at historic lows, fixed income investors may find higher yields through investment-grade corporate bonds, Mukherjee says. And municipal bonds can be an important source of tax-exempt income. "Still, holding some Treasurys in your portfolio will provide needed ballast against riskier assets like equities," which tend to be more volatile than many bonds, he adds.
There are enough open questions about what's ahead to keep market volatility elevated, especially early in 2021.
— Niladri Mukherjee,
head of CIO Portfolio Strategy, Chief Investment Office,
Merrill and Bank of America Private Bank

Surging technology and health care

Those low interest rates help create an environment that's better for stocks than for bonds, Mukherjee notes, "and the pandemic has supercharged several major trends." For example, companies that had already transformed themselves to serve consumers or businesses digitally — or that quickly improved their capabilities — have thrived during the past year. "Now, any company not keeping up on digitalization runs the risk of becoming irrelevant very quickly," he says. "And as trends such as working from home become more entrenched, the need for bandwidth and communication infrastructure will become paramount." In the wake of the pandemic, spending on health care is likely to rise, especially in developing countries.
Investing implications: The "e-everything" economy should favor artificial intelligence, robotics, 3D printing, factory automation and digital platforms, Mukherjee says. Investors may also find opportunities in all areas of health care. Regardless of industry, it's important to emphasize high-quality companies with solid balance sheets and good cash flow, Mukherjee adds.

A greater focus on sustainability

The challenges of 2020 have also accelerated the rise of sustainable investing and stakeholder capitalism — the idea that businesses must support not just stockholders but employees, communities and the environment. Mukherjee points to growing evidence that companies with better environmental, social and governance (ESG) records may perform better financially.Footnote 1
Investing implications: Taking sustainability into account could help investors find companies likelier to prosper through times of transition and change, Mukherjee notes. Depending on your situation and investing needs, that could mean investing in companies with strong ESG records, regardless of industry, or even investing directly in ESG-related areas such as renewable energy.

What you can do to prepare

The start of a new year is always a good time to take stock of your investments and think about what shifts might be driving growth — especially for 2021, Hyzy believes. "Consider market and economic cycles, where yields may be headed and what the key economic trends are," he suggests. "Then, assess whether your portfolio might be prepared to capture these emerging opportunities, while helping protect against what worries you."
According to Mukherjee, "investors will need to adopt a new mindset to portfolio strategy in a post-coronavirus world." That means looking closer than ever at your portfolio to ensure you have the right mix of assets to achieve your long-term goals, making adjustments as needed and, above all, having the discipline to stick to your strategy, he says.
And keep in mind some valuable lessons from 2020, Hyzy suggests. "The first thing we learned is that the economy is much more nimble than people thought." That idea extends to individual investors, he adds. "It's not always clear what's going to happen next. But you do have the power to adjust and move forward."
It's not always clear what's going to happen next. But you do have the power to adjust and move forward.
— Chris Hyzy,
Chief Investment Officer
Merrill and Bank of America Private Bank
Next steps

Footnote 1 "ESG from A to Z: a global primer," BofA Global Research, November 2019

Information is as of 12/17/20.

Opinions and hypothetical forecasts are those of the author(s) and subject to change.

Investing involves risk, including the possible loss of principal.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Bonds are subject to interest rate, inflation and credit risks.

Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.

Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks and other sector concentration risks.

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

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