What are your predictions for 2021

Nuveen chief strategist Doll: 10 predictions for 2021

1.   US real GDP is growing faster than it has been in twenty years.

There are still suffering industries, such as travel, leisure and entertainment. However, many sectors have also benefited from the pandemic, for example parts of the technology sector and healthcare. The consensus for the GDP forecast in 2021 is 3.8 percent; we assume that GDP will grow by more than 4 percent, which would be the highest annual economic growth in this century. We expect the economy to expand again in the third quarter, or maybe even in the second quarter.

2. Inflation is approaching the two percent mark, while the yield on ten-year US Treasuries reaches 1.5 percent.

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The general expectation is that interest rates and inflation will rise, but our targets for 2021 are in line with consensus levels for 2022. A key factor in our view is that the Federal Reserve has changed its policy to aim for an average level of inflation rather than an inflation peak. We also believe that higher commodity prices, a weak US dollar and sectoral movements within the equity markets indicate higher interest rates and inflation.

3.  The U.S. Dollar sinks to a five-year low.

After a significant increase in the US dollar at the beginning of 2020, the dollar exchange rate fell significantly. However, it has only moved from the top to the bottom of its five-year trading range. The significantly worse US balance of payments and low net savings rate coupled with our expectation that global growth will recover faster than US growth leads us to believe that the US dollar will fall below this trading range in 2021, if the trade-weighted US dollar index is approaching 85.

4. Stocks hit highs for twelfth consecutive year but cannot keep up with strong earnings growth.

The US stock market has hit a new high every year since 2009. We expect this to continue to be the case in 2021. However, we also assume stocks won't keep pace with earnings growth of more than 20 percent. In other words, US stocks have risen nearly 70 percent since their March low. This steep recovery is likely 'borrowed' in part from 2021. Most observers (including us) agree that stocks are not overpriced relative to any other asset, particularly government bonds, but are not overpriced relative to their historical absolute levels.

5. Stocks are outperforming cash, but cash outperforming government bonds for the first time since 2013.

As the fourth prediction suggests, we are bullish on equities for 2021. As the second forecast shows, we are cautious about interest rate sensitive securities. As a result, we expect stocks to outperform cash and cash outperforming US Treasuries this year. Stocks can stagnate over the course of the year and still perform better than cash because stocks are currently generating higher returns. Since bond coupons are currently very low, the cash yield would only have to increase slightly to outperform the yield on US bonds.

6. Value, small and non-US stocks (especially emerging markets stocks) outperform growth, big and US stocks.

For many years, US large cap and growth stocks topped the equity markets. And while we're not advocating selling this trio, non-US, small-cap, and value stocks with relatively better performance have come to life - a trend we believe will continue. This development will not run in a straight line, but the comparatively low valuation of non-US stocks, small caps and value stocks combined with expected economic and earnings improvements should accelerate this trend.

7.   Healthcare and financials perform better than energy and utilities.

The healthcare sector offers investors good earnings growth and reasonable valuations, provided that no political headwinds develop. Financials appear undervalued and we expect credit growth to pick up again, which should help the sector. Less attractive are energy, where demand is weak and supply is strong, and utilities, where there is general cyclical profit-taking along with modest inflation and a rise in interest rates.

8. US national debt rises to its all-time high of more than 100 percent of gross domestic product (GDP)

The coronavirus pandemic sparked an explosion in government aid and stimulus programs, pushing the U.S. budget deficit from 5 percent of GDP in 2019 to 15 percent in 2020. We assume that debt will again exceed 100 percent of GDP in the coming year and will rise rapidly with increasing spending and higher interest rates.

9. The US-China Cold War continues, but negotiations are becoming calmer and more multilateral.

The US leads the world economically, technologically and militarily. But China is striving to oust the US. Although their approaches differ, Republicans and Democrats share concern about China's ambitions. One of President Biden's priorities will be to approach the issue multilaterally, as opposed to President Trump's unilateral approach. Relations between the US and China will continue to have a significant impact on capital markets in the years to come.

10. Despite the polarization, President Biden and moderate forces will compromise the law.

The slim majority of Senate Democrats favor a government that is willing to compromise. We expect an infrastructure package as well as reforms of tax policy and the minimum wage. It is unlikely that more progressive Democratic measures such as the "Green New Deal" will be adopted, which ensures more security in the markets.

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