It's Your Money  

2021 economic outlook

As we head into a new year, many wonder what is in store for markets.

2020 brought a major market pullback in the spring, but then an equally strong and quick recovery followed by sustained growth into year end.

Most major indices (Canada excluded yet again) finished the year quite strong and the U.S. technology stocks posted some remarkable gains.

But with all of this growth already taken place, can the bull market continue?

The year ahead is shaping up to possibly be an extraordinary year for investors, as a uniquely bullish environment takes form.

Driven by the promise of successful vaccines, the global economy looks set to experience a broad, synchronized recovery in 2021.

As vaccine deployments drive economic re-openings worldwide, activity will be boosted by pent-up demand.

Corporate earnings, already back to pre-COVID levels in many countries, will push to new highs.

Economies will feel the lagged impact of massive global monetary stimulus and, in many cases, additional fiscal stimulus.

With central banks anchoring benchmark interest rates near zero, risky assets like stocks and bonds will continue to find valuation support.

Higher demand will lift prices of commodities tied to economic growth (for example, oil and copper) and likely weaken the U.S. dollar.

Sure, there are risks of speed bumps along the way - most notably a surprise delay in vaccine deployment - but 2020’s unprecedented global economic shutdown has set the stage for what may be an unprecedented recovery.

As a wave of hopeful vaccine news emerged in the closing months of 2020, the Organization for Economic Co-operation and Development (OECD) said the global economy was turning a corner and would improve in 2021.

The OECD now sees global growth of 4.2% for the coming year. Even without the availability of vaccines, many countries are already seeing improved economic momentum.

China, the first major country to impose and then lift restrictions, was early in returning to strong growth that has lifted others in its supply chain (for example, Taiwan and South Korea) and export-oriented countries around the world (such as Japan and Germany).

In a synchronous recovery, all regions are expected to see solid gains, especially some of those that were hit hardest by the pandemic.

Investor optimism had already stepped higher in early November with the declaration of Joe Biden as president-elect in the U.S., which removed much of the political uncertainty that weighed on markets in 2020.

Less than a week later, markets began receiving steady doses of good news on vaccine progress. The wave of hopeful news sent several stock benchmarks to all-time highs, which were broken again just last week.

The prospect of a faster “return-to-normal” is the confidence-booster that will encourage increased labour force participation, unlock pent up demand in areas such as travel and entertainment, and lift growth worldwide.

The year may get off to a slow start because of surging COVID cases and renewed restrictions. Gains in employment and other measures were coming at a slower pace as 2020 ended. Europe may even see a double-dip recession.

However, effective vaccines are expected to accelerate growth by the second quarter.

Already, the expectation of better growth has caused the U.S. dollar to collapse to a 2-½ year low versus other major currencies.

Copper has climbed to its best level in seven years and West Texas Intermediate oil (WTI) to its highest price since last February.

Oil will likely continue to see a gradual rise, moderated by the measured easing of output cuts that the Organization of the Petroleum Exporting Countries implemented last year in the wake of the COVID related collapse in demand.

As growth accelerates, most major central banks have indicated they will remain on hold for the foreseeable future. Officials at the U.S. Federal Reserve were early in suggesting they are willing to let inflation run a “little hot” for a while to ensure the recovery doesn’t falter.

Rising inflation expectations (if not actual inflation) will lead to some upward pressure on longer-term bond yields, steepening yield curves.

By early December, the yields on 10-year Government of Canada bonds and U.S. treasuries rose to their highest levels since last March.

However, most observers think the upside to yields is limited, and that, considering the massive amount of debt that was issued in stimulus efforts, central banks would step in to stop rates from rising so high that they “blow up” federal budgets.

As always, there could be some new and yet-unknown event or crises that appears this year that alter the above predictions.

But the way global economic affairs sit today, it looks like 2021 could be a great year of growth and hopefully, better health for all too!

Don't let greed guide you

The new year typically brings the same investment timing questions each and every year:

  • Should I wait until the end of February deadline before putting my RRSP contribution in?
  • Should this be the year I switch to regular monthly contributions?
  • Should I put money into my TFSA now or wait for a market correction?

While there is no doubt that timing contributions at just the right time can add significantly to investment returns, it is difficult to do once and near impossible to pull off repeatedly.

The brightest investment minds in the world regularly make bad calls so why does the average investor think they can do better?

Attempting to time the markets and avoid pullbacks more often lead to missing out on significant advances since they occur quite often at unexpected times.

The key to successful investing is actually quite simple – you need the discipline to stay invested and understand that it is time in the markets, not timing the markets, that creates most wealth.

U.S. large cap stocks returned more than 500%  between the low of March 2009 and the high in February 2020, and history has shown this is the norm and not the exception.

Major market events that felt quite serious at the time including the 2008 “great recession,” the bursting of the dot-com bubble, the “Black Monday” event in 1987, and now the COVID correction of 2020, look like minor blips in long term market charts.

With the odds so overwhelmingly in favour of gains, why do so many investors fight those odds trying to time the market?

In my opinion, it all comes down to two basic human emotions – fear and greed. Allowing these two emotions to steer your investment decisions can be dangerous and costly… 

As we start a new year off in times that are very much uncertain, do yourself a favour and don’t think too much about when to put your hard-earned money into your investment accounts.

If the money is earmarked for long-term savings, put it into your account and forget about it.

Or better yet, set up automatic monthly contributions to your RRSP and TFSA accounts and resist the urge to change them. 

While the timing of the next downturn is hard to predict, staying on the sidelines looking for an optimal entry point usually results in missing out on the biggest market gains.

What is predictable is that markets will continue to advance over time.

Accept that market volatility will always exist and let time be your friend.

Resolve to save more

There are only four days left until the new year and I’m sure most of us are excited to put 2020 behind us.

But as different as this past year has been, there is a time-honoured tradition that is sure to be followed as we always do starting out a new year — creating a bunch of resolutions that will only last a few weeks…

Many of these resolutions fail because they’re too lofty or unachievable. Goals need to be simple, within reach and achievement should be clearly definable.

While health-related goals are important, financial health and well-being is often overlooked. So this year, set some more realistic financial goals that you can achieve. I could easily list 10 or more ideas here but with the goal of keeping things simple, I suggest we start with just three.  

The following three goals are not only achievable, I’ll break them down with specific targets to track:

Create a budget

Budgeting is something often talked about and tried but rarely done well or followed through on. Yes, it takes some work but if you persevere, the rewards are better control of your spending and more freed up cash flow to put against debt or into savings. Your goals:

  • Download an easy to use app to get started – I’d suggest Mint or YNAB (you need a budget) as both get great reviews and are easy to use
  • Put aside some time in your calendar each week to track and update the app and stick to it! 
  • Pick one category each month to reduce your spending.

Get out of (or reduce) your debt

By focusing on your debt instead of ignoring it, you can make a difference in how quickly you pay it off. While it may take some sacrifices to get under control, the sooner you get started the easier it will be. Your goals:

  • Set up a debt-management plan. This should list each debt you owe, the interest rate it carries, and the payment terms.
  • Using your budget from above, determine how much money you have to put against debt each month. Pay the minimum only on all debts except the one carrying the highest interest rate and put everything left against that until it is paid off.
  • Identify one way each month to free up more cash flow to put against your debt. This could be done by reducing an expense, selling something you no longer need or finding a way to earn extra income.

Start saving money

While the standard goal of saving at least 10 per cent of your income each month is not attainable for many, the key is to just get started. By establishing a savings habit now, you are setting a trend for the rest of your working career.

If a retirement illustration suggest that you need to put away $500 per month to reach your goals but you can only afford $100 per month right now, that amount is still a lot better than saving nothing. Your goals:

  • If you don’t already invest savings each month, you need to start. Even if you begin with $25 per month, you need to get started now. You can setup an automatic monthly contribution to an RRSP or TFSA account easily online and the money will be drawn automatically from your bank account. Set this up before the end of January.
  • If you already contribute to savings regularly, it is time to increase those amounts. Any increase, no matter how small, will improve your odds of success. Once you’ve setup the increase, put a note in your calendar every six months to do another small increase.
  • Free up some cash flow if need be to make this happen. Dine out less, cut down your utility bills or cancel a subscription you never use. There are many options here!

While these goals may seem intimidating, getting started is within your power and the sooner you do the farther ahead you will be. Let’s not only put the year that was 2020 behind us this week but take action to make 2021 the year that you take control of your financial future! 


Retirees need equities

For those soon to retire or already retired, market volatility and emotions are their two worst enemies when combined.

They are fearful of their retirement portfolios taking a “big hit” if markets drop and then running out of money.

In their minds, the logical solution is to seek the “safe haven” of bonds and other fixed income. 

But there is something else they should be more fearful of — guaranteeing they will run out of money by being too conservative. 

For years, investors have been warned about “sequential risk," that is the risk of retiring just before a bear market begins. With that risk so regularly discussed, many are drastically reducing the amount of equities they hold in favour of “safer” fixed income investments. 

The problem with fixed income though, is that it doesn’t produce any meaningful returns. And once you put inflation and taxes on top, the net purchasing power of money invested in fixed income is guaranteed to go down each year. 

Yes, equities are more volatile but if your goal is to maintain your ability to pay expenses over three decades with ever-increasing costs of living, equities are really your only option. Why do I say that maintaining a high stock allocation is necessary, even if it increases volatility? 

Risk rewards

Volatility is the entire reason that stocks provide higher returns than bonds.

Investors are rewarded for taking part in this volatility, but it doesn’t have to be a bad thing. Proper investment management can take advantage of it by deploying additional cash during downturns to boost returns further. Income needs can be managed by keeping a healthy emergency fund or cash reserve. 

No crystal ball

There are many products and service providers out there that claim they can get equity like returns without the volatility but unless they have a crystal ball, this is not possible. Suppressing volatility means suppressing returns. Instead you need to embrace it for what it – there is no free lunch out there. 

Sequence of returns

The sequence of returns risk does not apply to your entire retirement account, unless you plan to spend all your money in the next few years. If your retirement plan spans three decades, the money you will spend in years five to 30 can easily absorb a short term drop as they’ll fully recover well before you need it.

Yet many feel they need to invest their entire account as if it will be spent soon. 

Volatility vs risk

Many people mistake volatility for risk, but they are two different things. Volatility in itself doesn’t make your personal financial plan riskier as long as it is managed right. But you know what does?

The fear of volatility creating a permanent reduction to one’s standard of living for the rest of your life.

Every time the markets drop, plenty of people come out of the woodworks to say why this time is different and they will never rebound. Yet every time they drop, markets not only rebound but grow to new highs. 

Equities will no doubt see drops and even crashes again, but those will be temporary and investors willing to hold on through them will be rewarded on the other end.

More It's Your Money articles

About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

Previous Stories