Stephanie Link: Expect Above-Average Gains in 2021

Kiplinger’s: What do you see ahead for 2021?

Link: To talk about 2021, you have to put it in the context of 2020. We have to deal with the increase of COVID cases versus progress with vaccines and with testing. The time line is uncertain for the next round of fiscal stimulus, but the fact that we need it is absolutely certain. All of this is against the backdrop of way-better-than-expected corporate earnings. So, companies are dealing with all these uncertainties, but sometimes investors cannot, and this is why you have fluctuations in the market.

Where is the economy headed? The economy has been uneven, and that will continue until we get a vaccine—which is why the Pfizer news of a successful trial is so important. Pockets have done well—housing, autos and manufacturing have seen a V-shaped recovery. But there’s a lot of bad: travel, leisure and hospitality, small and medium-size businesses closing every day, 10 million people unemployed. It’s important for the good pieces to pick up the slack until we get another stimulus package. You could potentially see gross domestic product growth of 4% to 5% in 2021.

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How will the market adjust to a new president? I think the market likes a Biden win with a split Congress because it’s gridlock—you don’t get many surprises. But research from Capital Group shows that over the past eight decades, in 18 of 19 presidential elections, no matter which party won, a hypothetical $10,000 investment made at the beginning of each election year would have gained in value over the next 10 years, and in 15 of those 10-year periods, it would have more than doubled. I don’t want to say the election is meaningless, but it really is less important than other fundamentals over the long term.

What would you focus on? I have learned over my career that stocks follow profits, and if profits are going higher, stocks eventually will. Earnings are recovering nicely, which tells me that fiscal and monetary stimulus is doing its job. Next year we could see earnings growth of 30%-plus. Find good companies with high market share and good balance sheets. These companies are getting help from all the stimulus, but they’re also doing an amazing job at figuring out how to deal with this pandemic and the recession.

Do you have a target for the S&P 500? I don’t. But I think returns will be above average, in the high-single-digit percentages, given historically low interest rates and economic stimulus. I do think all of this money pumped into the market by the Federal Reserve matters. There’s a reason why people say “Don’t fight the Fed.”

What themes do you see playing out in 2021? I advocate a barbell approach. You want to own both growth-oriented stocks and “cyclical” stocks. If I’m right about all the stimulus leading to better economic growth, then you want to own those economically sensitive companies. They’ve cut costs, and their profit margins are solid. If you get an improvement in revenues, then the impact on earnings is huge. Look for blue-chip-quality companies—with good balance sheets, rising dividends and increasing market share.

And the growth side? We know technology is over-owned. You don’t have to chase those stocks. But the addressable markets in a few themes—artificial intelligence, subscription-based software cloud computing, e-commerce and contactless payments—are going to be huge. You have to pick the winners and losers, but these are the themes that you want to have exposure to.

What are some examples of stocks to consider for 2021? In tech, I like Salesforce.com (symbol CRM) and NXP Semiconductors (NXPI). I like autos, but instead of Ford or GM, I want to own auto parts companies, like Aptiv (APTV), which provides safety tech­nology and connectivity in the car. I like what Fortinet (FTNT) is doing in cybersecurity. In industrials, I like Caterpillar (CAT) and United Parcel Service (UPS)—that’s a great company with a new CEO. Housing is a powerful theme. Look at a builder, such as D.R. Horton (DHI), or toolmaker Stanley Black & Decker (SWK). You can offset safe housing stocks with hospitality stocks, which are still down a lot. Marriott International (MAR) is interesting, as is Wynn Resorts (WYNN). You can’t get over your skis in these stocks until we get a COVID vaccine, but these are quality companies. I love the animal health business. I’m putting my chips on Zoetis (ZTS).

Where do you stand on foreign markets? The demographics and the stimulus put in place in emerging Asia Pacific countries, and in China specifically, are positives, and those countries have come out of the pandemic quicker. But emerging markets can plunge in a heartbeat. I would put a small percentage of my stock portfolio in emerging markets—5% to 10%—and I’d use a diversified, index-based exchange-traded fund. Europe is certainly cheap. The problem is, companies there can’t restructure the way U.S. companies can, so their profit margins are low.

What’s your take on fixed-income investing? With interest rates so low, we have to think out-of-the-box for yield. Depending on your risk profile and your time line, maybe that’s a combination of Treasury inflation-protected securities, preferred stocks, gold, bond-like stocks—such as an AT&T or Verizon—and stock-like bonds, including investment-grade corporate debt. I’d put a little emerging-markets debt in that basket, too.