The past year has been unforgettable in a myriad of ways. Our world as we know it has been turned upside down — not only altering the reality of our personal lives, but also completely changing the way we work and even how we buy and trade stocks. The financial sphere has been markedly impacted over the past year and a half, so much so that it may be difficult for many of us to visualize what’s next, both near and far into the future.
Last month, our partners at LPL Research published their Mid Year Outlook. Their research dives into just that: how might our economic future look? And what should you be focusing on for your financial future?
According to LPL’s insights, our economy is moving full steam ahead as the US reopens and the globe appears to be following suit. The mid-year report presents an optimistic view of the growth of our economy on a national and global scale:
“After a 2020 we will never forget, we look ahead to the second half of 2021, and even into 2022, with optimism for the future,” said Burt White, LPL managing director and chief investment officer. “We believe we are early in the economic cycle and the next recession is potentially years away. With a strong start to a bull market and a relatively calm market environment, it may be an ideal time for investors to get a financial plan in place with a trusted advisor, if they don’t already have one, to help hedge them against any unpredicted market events like the ones we saw in 2020.”
Need some “Cliffs Notes”? Happy to oblige! Here are our takeaways and thoughts from our team at Arsenal Financial as we take stock of the chapter ahead.
Top Takeaways From The LPL Mid-Year Outlook
- We’re in the early stages of a new economic expansion. As the U.S. shifts into a post-pandemic future, the U.S. is in the early stages of a new economic expansion which may have years to run. We’re expected to rebound in global growth as the pandemic slowly recedes. Earnings could grow into current elevated valuations. LPL researchers forecast 6.25 to 6.75% U.S. gross domestic product (GDP) growth in 2021 alone, which would make it the best year in decades.
- Bonds still have a role in portfolios. Bonds have low projected total returns expected in the near term. In addition, inflationary pressure and economic improvement may put added pressure on the 10-year U.S. Treasury yield. The 10-year yield is anticipated to finish in 2021 between 1.75 to 2%. So, why bonds? High-quality bonds tend to hold up during market declines and still generate income which compounds over time.
- Stocks are gaining ground: Economic growth should still help support the growth of the S&P 500 Index. The Index already had a stunning first quarter growth. Higher corporate taxes may weigh on markets, at least temporarily.
- Deficits could create pressure on the U.S. dollar: Deficits could be a positive for both foreign stocks and exports, but a negative for imports. Companies with a U.S. supply chain and international sales could benefit. Companies with a foreign supply chain which sells primarily into the U.S. could be pressured – or have to raise prices.
- Waning and ending of stimulus and support: Throughout the pandemic, U.S. economic policy has been a cornerstone of regulation. The economy was supported by $5 trillion in stimulus measures and support from the Federal Reserve. This has led to all time highs in cash holdings for companies and consumers, highs in credit score…not to mention highs in stocks and property prices. Policy will now take a back seat as the “bazooka” of multiple-trillion dollar stimulus cannot be counted on.
What does this mean for you?
So, how do all of these financial forecasts outlooks impact you? Good question! As an Arsenal Financial client, we’re here to help you navigate all the tricky twists and turns in the market – and make the most out of your finances.
- Cash over the long term means negative returns: The cost of living is only rising, and there’s no denying it: cash doesn’t have any yield. If you have cash sitting around with a goal more than five years out, you should have a coordinated strategy to grow that capital, albeit one that takes the goal of the funds and risk level into consideration before thinking about potential returns.
- Continue to invest in measured amounts of global stock. Investors seek to grow capital, and the continued driver of portfolio growth will be stock exposure. Earnings in the U.S. are back at all time highs and rising. Keep in mind, the stock market is never a straight line up and will experience bouts of turmoil and corrections.
- Diversify bond holdings. Like we mentioned above, bonds can be a great safety feature in the current economic climate. We recommend retaining bond holdings, but diversifying “beyond the core.” What does that mean? A diversified portfolio of bonds as a ballast to stock investments can still make sense — but investing in just treasuries may not cut it anymore.
- Stick to the PLAN! It may seem tempting to deviate and try new things, spur-of-the-moment, when you see promising financial news. But it’s so important, now more than ever, to stick to the plan. Every “bucket” of money should have a goal and a measured risk level. Once a plan is put in place which aligns with goal and risk – STICK TO THE PLAN until the plan needs to be adjusted.
In 2020, having a financial plan and sticking to it proved itself to be invaluable… but that plan didn’t appear out of nowhere! It’s much harder to create a plan when you’re simultaneously trying to navigate a tricky environment. We build financial plans when times are easier so we have something to stick to and fall back on when times are hard, and when times are a bit easier – we can focus on what matters: Life and Living.
So, as we move full-speed ahead, we can take some time to enjoy the ride, but keep in mind that these are the times when planning is the most effective. There’s an opportunity to plan early in the economic cycle with the next recession possibly years away and a relatively calm market environment. In fact, right now is the ideal time to update us on your financial goals and to prepare for the future! Give us a call — we’re here to help!
Disclaimer: The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risks. Bons are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.