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2021 Market Outlook for U.S. and Canada - BMO Experts

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Research & Strategy COVID-19 Insights November 26, 2020
Research & Strategy COVID-19 Insights November 26, 2020
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As key North American stock markets hit all-time highs, BMO Capital Markets Chief Investment Strategist Brian Belski hosted a call on Tuesday to discuss the Investment Strategy Groups recently published 2021 Market Outlook for the U.S. and Canada. In a call joined by Margaret Kerins, BMO Capital Markets Head of Fixed Income, Currencies and Commodities Strategy, and Sal Guatieri, BMO Director and Senior Economist, our experts discussed how markets are weighing the likely impact of a Biden-led presidency amid a worsening pandemic, and what recovery and even growth may look like over the next 12 months.

Unprecedented Bull Market Continues

On a day that both the Dow and the S&P hit all-time record highs, Brian Belski said BMO Capital Markets forecasts the unprecedented bull market will ring in unrivalled results for yet another year in 2021.

Even as North American stock markets rebounded 50 percent from March 23 lows this year as a result of the global pandemic, Belski said his team maintains its 20-year bull market forecast.

We really believe that March 23 was the CTRL-ALT-DELETE, the reset for the next 10 years of our 20-year bull market,” Belski told the call, adding that, Bottom line, we think that the next 10 years of the bull market will look much different from the previous 10 years.”

He said performance going forward will be less binary and less about momentum, more about fundamentals and less about macro monetary fiscal dependence, and have a much healthier, long-term profile, with a broadening of market performance.

Return to Stock Picking

Calling for a return to the art of stock picking, Belski added, We believe that bottom-up fundamentals is what is going to lead the next 10 years of the bull market, where much of the last 10 years was about macro investment and quant investing.”

Underpinning market strength in 2021, Belski said, are the baseline assumptions for one or more effective vaccines to become widely available at some time in the first half of the year, and likely one more round of fiscal stimulus in the United States, in the $1 trillion range. Forecasts also assume less policy uncertainty under a new administration, especially with respect to trade.

U.S. Sector Outlook

Turning to the sector outlook, Belski said his team upgraded U.S. Financials to overweight from market weight and Industrials to overweight and downgraded Communications Services and Tech – where the team has been a long-standing bull -- to market weight.

Common sense says if you add those two sectors together, its 40% of the market or near that, and we believe that's a little bit too concentrated,” he said, noting the change is a call to maintain positions rather than to sell. He said a broadening of performance in the sector would call for stock picking. We do believe these two sectors in particular, along with parts of consumer discretionary, will be a very strong component to the stay-at-home trade in 2021, especially if and when we see further lockdowns either at the state level, or more the federal level.”

The Energy Difference

Belski said the group was underweight in U.S. energy, which he sees in secular decline, and prefers Canadian energy companies.

I think the biggest change with respect to both countries would be our comment on energy. We believe that Canadian energy companies are better managed assets,” he said. U.S. energy companies are more reliant on the price of oil and Canadian energy companies have a lot stronger cash flow and management product.”

More broadly, Belski said that a predominant theme for Canada is undiscovered value and, As America goes, so goes Canada. North American equities will likely continue to set the pace.” He pointed in particular to Canadian themes, industries and companies that capitalize on cross-border business relationships with the United States, including Canadas leading banks.

Fixed Income – The Yellen Factor

Margaret Kerins, BMO Capital Markets Head of Fixed Income, Currencies and Commodities Strategy, said a key consideration for markets going into 2021 will be the appointment of Janet Yellen as President-elect Joe Bidens pick to lead the US Treasury Department.

The market is really looking at this, thinking that the chances that the Fed programs that are expiring at the end of the year may be extended when she takes over the role, which would likely be by mid-February,” said Kerins.

With respect to the outlook for investment grade credit, spreads continue to narrow as the economy recovers and investors reach for yield in a low rate environment, and in the backdrop of Fed accommodation.

In addition, she underscored that net Treasury issuance next year is expected to be about $1.6 trillion in coupons alone, issued into the private market.

In yields over the next few months, Kerins sees a bear steepening that might not be driven by the economic data alone, but also by some of the geopolitical risks that are percolating in the market. The result will be treasuries that remain range-bound next year, “with a bit of a rally in the second and third quarter, to end the year a tad higher.”

Economy – From Winter Chill to Summer Heat?

Sal Guatieri, Director and Senior Economist at BMO Capital Markets, used a weather forecasting analogy to describe how he thinks the second wave of COVID-19 and resulting restrictions will impact the economy in the coming months, and why the future looks brighter down the line.

“If I was a weather forecaster instead of an economist, I'd probably say, ‘we can look ahead to a chilly winter, but a warm spring and a hot summer,’” he said.

Now that the second wave of the pandemic is here, so too are further, government-imposed restrictions, though not to the same level seen in the spring, which Guatieri described as “lockdown-lite,” because government support is already in place, and many businesses have figured out ways to adapt through remote work and online delivery platforms.

“Still, the tighter restrictions and lower confidence could bring the recovery to a standstill for a while,” he said, predicting that Canada will feel the chill before the U.S.

“More aggressive restrictions in Toronto and Manitoba, we estimate, could carve about five percentage points from annualized growth in the fourth quarter, possibly stalling the national recovery,” he said. On the other hand, he said the Canadian economy is protected from a fiscal cliff thanks to government support programs for the unemployed that extend well into 2021.

He predicted the U.S. cool-down will come in the first quarter of 2021, “due to the looming expiration of emergency UI programs that will cut off funding for millions of unemployed, slashing personal income by about 1% next year.”

“If things go right,” Guatieri continued, “the economy should begin to warm up nicely by the spring, even assuming a split Congress after the two run-off Senate elections.”

He and his team expect to see up to $1 trillion in fiscal measures, equal to about 5% of U.S. GDP, with incoming Treasury Secretary Yellen potentially pushing for more support from Congress.

In addition, there’s the question of savings that have accumulated since February for both American and Canadian households, which will support continued consumer growth moving forward.

“Earlier this year, government transfers offset the loss of worker compensation by a factor of three in the U.S. and by almost as much in Canada,” Guatieri said, “which explains why personal income actually rose rather than fell during the recession.”

Hotter Summer

The introduction of a widely available, safe and effective vaccine, he said, will be an economic game changer, unleashing pent-up demand for services, notably travel, by the time summer hits.

“So while the near-term picture for the economy has dimmed, the medium-term view is brighter, and we still expect 5.5% growth for Canada next year, and 4% growth for the U.S.,” said Guatieri.

Regardless of the economy's temperature next year, Guatieri said it’s a near certainty that interest rates will remain on ice, and low borrowing costs will continue to support interest-rate-sensitive sectors such as housing.

“Neither the Fed nor Bank of Canada is expected to begin raising rates until 2024, largely because of continued, below-target inflation,” he said.

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Brian Belski Chief Investment Strategist
Sal Guatieri Director and Senior Economist

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