How to Start Investing in 2021 and Where to Look
THANK GOD 2020 is almost over!
Really, I gotta feel sorry for all the kids born this year because from now on, they’re going to tell someone the year they were born and it’s just going to be cringes and, ‘Oh…that suuuucks!’
But putting the year behind us also means getting ready for 2021 and how to invest!
Over the next two months, we’re going to be talking a lot about 2021 investing strategies including what to invest in and how to be ready but first, I wanted to do a higher-level guide for you. Look at where the market is at, what I’m watching and where I’m investing in 2021.
Good Riddance 2020, Hello 2021 Investing!
Nation, it has been a CRAZY market this year! From the 35% stock market crash to surging higher 60%, the world’s wealthiest have become $813 billion richer this year!
But not everyone has been so lucky. A lot of investors panicked when stocks crashed and didn’t benefit fully from the rebound.
This is your second chance though, a chance to be ready to invest for 2021 and why I think it could be an even bigger opportunity!
In this video, we’ll start by looking at where the stock market is at heading into 2021. I’ll then show you what to invest in now and how to be ready for anything next year. Stick around because I’m going to be revealing the step-by-step investing strategy I’ll be using towards the end of the video.
Where is the Stock Market Heading into 2021?
We’re going to start with that stock market update…and I know this isn’t as sexy as picking stocks or that how to invest strategy but please, PLEASE watch through this part because understanding this big picture stuff is going to help you make better decisions on how to invest when we get to that strategy and then to those individual stock picks over the next two months.
Nation, the market is undeniably expensive. This is a chart of the market PE ratio, so the price investors are paying for total earnings reported by stocks in the S&P 500, and what you see here is the green dashes are the five-year average PE ratio and the blue dashes are the 10-year average.
Look at that line though, at a price over 22-times expected earnings, the market is now 39% more expensive than that 10-year average. In fact, you have to go back to the tech bubble in 2001 to find a market more expensive than this.
And to see how we got here, you only have to look at the returns by sector for the year. As earnings have gone down, so as that bottom number in the PE ratio went down, we’ve seen prices for some sectors just explode higher! Consumer discretionary up 21%, tech stocks up almost 30% this year!
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Best Stocks of 2020 and 2021
But not everything is as expensive and that’s going to guide a lot of our strategy for 2021. Stocks in the energy space have plunged 51% with financials and real estate both in the red as well.
This is another great chart here, showing the PE ratios for each of the stock sectors plus the market index, the S&P 500. The dark blue is the current price of stocks in each sector against the earnings analysts expect over the next year. For comparison, the green bar is the 10-year average PE ratio for that sector and I’ve added the percentages here showing just how expensive some of these sectors are on that PE basis.
So on the one side, you’ve got stocks of consumer discretionary companies, tech stocks and industrials that are hugely expensive and really driving this market. On the other side though, you can still find some value in a few sectors like financials, energy and health care that aren’t trading quite as high off that 10-year average.
Stock Market Trends 2021
Now let’s take a look at what’s driving the stock market and we’ll put it all together for what I think could be the three best investments for 2021 and how I’m investing my money.
And it shouldn’t come to much of a surprise that the two biggest drivers of stock prices right now, and really into at least the first couple months of 2021 are a potential vaccine and new stimulus out of Washington.
We’ve got at least three companies well into their stage three testing for a vaccine; Moderna, Inovio and Pfizer with the latter already saying it would apply for emergency approval around the end of November.
Whether a vaccine gets us back to normal or how long it takes to distribute isn’t even relevant at this point. Just the approval of a vaccine is going to be a sentiment boost for investors and the economy and the market is baking that into prices already.
The other market driver is not just the $7 trillion-plus pumped into the economy from the Federal Reserve and government stimulus but the assumption we’ll get at least one more multi-trillion dollar stimulus if not two.
And the idea here is that if we do get more confidence from consumers that they can go out without getting sick and if we do get another trillion dollars or so pumped into the economy, that’s going to mean an explosion in growth and maybe these stock prices won’t look quite as expensive.
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Will the Stock Market Crash in 2021?
But what the market is missing is I think the longer-term reality of the virus and its affect on the economy. By most accounts, it’s going to take at least a year to get enough people vaccinated to where we see that herd immunity and people can feel some kind of normal.
Then you’ve just got the depth and enduring weakness of the economy. The rebound in restaurant reservations in purple and then retail store traffic in orange, and while both have rebounded since May, they’re still down significantly from last year. Restaurant reservations are still down 40% from last year and retail store traffic is down ten- to 20% heading into that critical holiday shopping season.
And while unemployment has come down, we’re still at record highs every week for the number of people filing. The Fed shows new unemployment claims each week, and even though the most recent week was lower than expected at 787,00 new claims…that’s still higher than at any other point in history. The peak for unemployment claims in 2009 was 660,000 in a week.
So while we do have those two forces, a potential vaccine and stimulus, helping stocks move higher now, I think it’s a short ride and it’s a lot of what will drive the market in 2021.
Best Investments to Buy for 2021
Now let’s put this together for what I think could be the three best investments of next year and then that strategy of how I’m positioning in this market.
For those of you following our 2021 Bow Tie Nation portfolio, you’ve already seen we’re positioning heavily in value stocks, especially those in the energy, financials and healthcare sector.
And I’m doing that for a couple of reasons. First is that if we do get back to even anything close to normal, it’s these sectors that will bounce back faster. Interest rates will rise taking bank profits higher, oil prices should gradually move higher and healthcare providers can get back to making money in something other than Covid19.
Also though, and this is key, if the economy doesn’t rebound as quickly as the market is expecting, then these value stocks don’t have as far to fall. With tech stocks trading at 26-times on that PE basis, prices would have to fall by 66% just to get back to the long-term average. By contrast, these stocks in energy, healthcare and financials, they fall any and they’re at fair value but even something as little as a 10% selloff puts them in deep value territory.
Second here is I’m using real estate as a hedge against any stock market weakness but with a huge warning. You cannot think of real estate as one market. This table shows the year-to-date returns by property type and the difference is amazing. While the overall real estate market, those REITs that trade like stocks, while it’s down 12% this year on average, some sectors have absolutely crashed while others are posting positive returns.
You’ve got a 30% loss on office property and retail property is down 39% from the beginning of the year. Lodging and resort property is down a stunning 49% with REITs in the space losing $22 billion in market value.
But a couple of these sectors are outperforming by a wide margin. Industrial property, so think things like warehouses and distribution centers, are up 9% this year. Self-storage is higher by almost 6% and data center REITs are up a whopping 25% on the year.
So I’m positioning in REITs like Stag Industrial which owns warehouses perfect for the ecommerce boom and pays a 4.4% dividend or data center REIT Digital Realty, ticker DLR, which has seen its stock price double in the last five years.
Last before we get to that specific investing strategy is don’t be afraid of cash! I know it sucks to have money sitting there in your investing account, not making money, but I think we get an opportunity at lower prices early in the next year and that cash is going to be your best opportunity.
That’s because traditional safety investments like bonds might not offer as much protection as you expect. With interest rates at historic lows, any bounce in rates is going to drive bond prices down so you might be forced to sell at a loss to raise cash and invest in lower stocks prices.
Cash though is going to be immediately investable and with inflation around 1.5% annually, you’re not losing out on anything by waiting it out.
How to Invest in 2021
So you’ve got that big picture of what the market looks like heading into next year and how I’m positioning, now I wanted to share a more detailed strategy I’m using for exactly how to invest. Again, I’ll be doing a series of videos on specific stock picks and investments over the next couple of months but this basic strategy is how I’m going to approach it.
On that probability of a vaccine later in November and the potential for not just one more stimulus package but maybe even another round, I’m bullish through January. An emergency authorization for a vaccine will be a big sentiment boost not only for investors but to the real economy as well. I think you get a jump in retail store traffic, travel and restaurant dining in those first couple of weeks after.
I’m more worried though as we head into the second quarter and summer of next year, so the late February to May period. Even with more stimulus, it’s likely that the longer-term economic weakness starts weighing on earnings and just the reality of how bad the unemployment picture starts showing through on the stock market.
For this, I’ll let my stocks run probably through January moving into some of those value names but also keeping my growth stocks in tech. Then as we head into February, I’ll use a combination of three positions.
One is I’ll take some profits from this year’s stocks and keep a chunk of it in cash waiting for those lower profits. I’ll also rebalance out of some of those growth stocks for a bigger percentage in value especially in those three sectors energy, financials and healthcare. Finally, for the stocks I do keep, I’ll sell some covered calls against them to collect cash and hedge against a drop in prices.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.