Here’s our 180-day stock market forecast

Warren Buffett said that stock market forecasters exist to make fortune tellers look good. Regardless, here’s our outlook for the next 180 days.

Regardless of Warren Buffet’s cynicism, we regularly turn our mind to forecasting the future.

Here’s our outline of what we expect of the economy and the stock market over the next six months. But put little faith into short-term predictions, including ours. Predictions are the weak link in the investment process.

Stock markets in Canada and the United States have hit new record highs. This reflects investor optimism on a number of fronts.

US Economic Impact Payments will help

First, US President Joe Biden has guided a $1.9 trillion American Recovery Plan through Congress. Part of this money will fund Economic Impact Payments. Individuals with adjusted gross income of up to $75,000 will receive $1,400. Married couples with adjusted gross income of up to $150,000 will receive $2,800. And for each dependent child, $1,400. This should greatly stimulate the American economy. For one thing, lower-income households mostly spend any extra income, while higher-income households are likely to save or invest it. For another thing, consumer spending accounts for 70 per cent of the American economy (versus 56.5 per cent in Canada).

Faster economic growth in the US will likely raise company earnings and share prices. Faster economic growth south of the border will raise economic growth in Canada, too. That’s partly because exports accounted for 32.1 per cent of Canada’s economy. And 73.5 per cent of those exports go to the US. In fact, Canada’s recent trade surplus was thanks to exports to the US.

Ending COVID-19 will restore economy

A second source of optimism is the feeling that the worst of COVID-19 is over. President Biden’s vaccination plan is ahead of schedule. He says starting May 1, any American who wants a vaccine will be able to get one. Part of the $1.9 trillion American Recovery Plan will go to significantly increase the number of vaccinations. Ending or substantially reducing the pandemic is critical to permanently reopening the economy.

A third source of optimism is that the US government will keep many businesses on life support. This will raise the number of workers who have jobs to go back to. Many unemployed or underemployed workers are likely to find jobs and more hours as the economy recovers.

The COVID-19 lockdowns reduced consumer spending in 2020. But now consumers are sitting on mountains of money. We expect pent-up demand to increase consumer spending.

A global recovery also bodes well for resource stocks. They should manage to sell higher quantities at higher prices.

Much financial business can be carried on by consumers working from their homes. And higher interest rates generally assist financial institutions.

But rising interest rates are negative for utilities. Their dividends become relatively less attractive as interest rates rise. And these capital-intensive industries must pay more to borrow the funds they need. On the positive side, with stock prices down, you can buy utilities on the cheap.

Keep a well-balanced portfolio

Remember to keep a well-balanced portfolio. We generally advise you to keep between 10 per cent to 30 per cent of your stock money in each of the five main economic sectors: finance, utilities, consumer, manufacturers and resources. If you’re a conservative investor, you should focus on the stable financial and utilities sectors. Particularly if you want to earn attractive and growing dividends. Companies in the less stable manufacturing and resources sectors can face unforeseeable setbacks. In recessions, they’re more likely to reduce or omit their dividends.

Were the inflation rate to jump, interest rates would follow suit. We see little risk from inflation for now, for several reasons. First, central banks in many developed countries want inflation of one to three per cent. But inflation has usually fallen below their targets. As a result, central banks may welcome somewhat higher inflation rates in the medium terms. Second, information technology and automation is lowering costs. Many retailers, for instance, are selling more than ever online. As robots and artificial intelligence become more able, companies may continue to install labour-saving technology. Third, international competition should keep a lid on prices.

Unforeseen developments could damage the stock market’s optimism. For instance, progress against COVID-19 could stumble. One risk is the spread of new more virulent strains of COVID-19. In Canada, the administration of vaccine shots is painfully slow and far short of what we need. A second risk is that rising interest rates may force governments to curtail their spending. This could reduce economic growth and company earnings and share prices.

Keep in mind, too, that the stock market is basically bi-polar. It regularly changes its mood. You should, however, build your portfolio the way that pioneers built their homes: not based on the latest weather but for the long-term climate.

This is an edited version of an article that was originally published for subscribers in the March 26, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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