The S&P 500 fell quickly in 2020 before recovering to new highs

This year has been like no other for the economy and the stock markets. No one could have predicted how a pandemic would disrupt the world. At this year’s Star Tribune Investors Roundtable, some of the area’s top investment strategists talked about the deep dive and then the return of the markets, how fiscal and economic stimulus measures affected the economy, and their predictions for next year as the coronavirus pandemic continues to dominate the economy as a whole. When the roundtable convened in 2019, estimates on where the S&P 500 Index would finish 2020 ranged from 3,150 to 3,500. None had predicted a pandemic driving the market to its low of 2,192, but it has since surpassed all their predictions. The roundtable was on Dec. 8, when the broad-based index closed at 3,702. Participants’ predictions for the S&P in 2021 ranged from up 7 to up 14%. Here’s a transcript of the discussion, edited for length and clarity.

The roundtable

Martha Pomerantz

Evercore Wealth

A partner and manager of the Minneapolis office of wealth management firm Evercore.

Mansco Perry

CIO State Board of Investment

Executive director and CIO, the SBI invests $100 billion for state retirees and other state funds.

Lisa Erickson

U.S. Bancorp

A SVP who heads the Traditional Investments Group for U.S. Bank Wealth Management.

Jim Paulsen

Leuthold Group

Chief investment strategist at Leuthold Group, and market and economic commentator.

Craig Johnson

Piper Sandler

Managing director and chief market technician of Piper Sandler’s technical research group.

David Royal


EVP and chief investment officer; oversees $152 billion for Thrivent’s 2.3 million clients

Give us a recap of 2020 from the pre-pandemic start of the year through the end.

Martha Pomerantz, Evercore Wealth: I feel like when we met 12 months ago, we were relatively optimistic. I mean we might have been late in the game from the upturn in ’08, ’09, but inflation was low, growth was OK, unemployment was coming down, people were getting back to work. We were relatively optimistic that it would be an OK year. So going into this, people were in a good financial position. I think people kind of forget that.

Jim Paulsen, Leuthold Group: The biggest thing that sits with me on the pandemic, and really as it relates to the response in the economy and in the markets, is I think that this was one of the most emotional crises we’ve ever had. We had all the normal stuff that you worry about in a recession with losing your life savings, losing your job, losing your business, but then we added the health crisis to it.

David Royal, Thrivent: One other thing I think is interesting about both the decline and the recovery is it didn’t look like other economic crises and recoveries. Obviously, the speed was different, but normally you would see services industry be a stabilizing influence and you’d see manufacturing, technology, housing all get hit. Whereas those are the three sectors that have really kind of led us out and services are what is lagging. That is just telling us it’s a very different kind of recession than we’ve had before.

Mancso Perry, State Board of Investment: We are up about 60% from March in the S&P, but it’s not across all sectors — energy is still awful, airlines are awful, real estate is awful, hotels awful. I mean, they’re all still down by double digits. But I’m having difficulties believing that five stocks or the office/retail sector is the cause for all the exuberance in the markets, particularly when I look at the mainstream economy. I mean, it’s crappy and there’s a disconnect, but yet the markets have seemed to be resilient and I think that there’s a story there.

Lisa Erickson, U.S. Bancorp: In my mind, there are two really positive stories, even despite all the hardship that came out of last year. One is really the resiliency of the markets and the second is what I would call the resiliency of the human heart ... which also contributed to what happened with the market. You had a lot of courageous people stepping in to really find medical solutions to the issues in front of us. You had stories of all the front-line workers who kept at it in terms of their job. You had a lot of people, despite some of the difficult events happening, stepping up to point out issues of concern, like some of the racial issues that really are more prominent now because of the unfortunate events that happened. So to me it’s really a positive story that hardship brought out some of these healing forces.

Craig Johnson, Piper Sandler: This was one of the fastest 20% drops in the equity markets we had seen going back all the way to the 1920s, and it was one of the biggest recoveries. And that recovery was really driven by the Fed — the way the Fed stepped up very quickly, cut rates and then started coming back in doing quantitative easing and started buying some bonds out there. We’ve gone from FOMO (fear of missing out on the longest bull market) to JOMO (joy of missing out on the pandemic crash) back to FOMO. And I think at this point in time, a lot of good news is getting baked in. And the question it comes down to is hope vs. the reality of markets from here.

Were the Federal Reserves moves in March an appropriate response to the pandemic and is more stimulus needed?

Pomerantz: Across the board, we needed somebody to step in quickly. It did look like a dire situation. And one of the best things that the Fed did was they basically backstopped all the fixed-income markets. They basically said, ‘We’re going to be here no matter what happens, don’t worry about it.’ They lowered rates so far down that people couldn’t think twice about it. And we would argue that there’s definitely a need for more at this point, but it doesn’t need to be that gargantuan, and it needs to be very targeted. There are certain businesses that need help to be able to get from here to there, and I think people are trying to be smarter about it.

Perry: I continue to think that there needs to be some focus on Main Street, and if there’s not, we’re going to have a problem — which means there probably needs to be some focus on municipalities. There are employees there, too, and the budgets are hurting. So there’s going to be pull back, and the services that we expect are going to be adversely impacted. So while the markets are going to be pretty strong, at some point this disconnect with the economy is going to catch up with us. So from that standpoint, I think that there probably does need to be some significant stimulus to kind of keep things from reverting back too far.

Royal: I think the market and the economy will probably get through just fine if we didn’t have another package, but there will be very significant human costs. So I think it’s kind of gone from a macro policy issue of systemic stability to this is more of a policy issue. What are we as a people want to do for these folks that are most affected?

Erickson: Bridging the gap between now and [when enough people are vaccinated] is really what’s key in terms of us talking about fiscal stimulus, because I think we can see help is on the horizon. It’s just that there’s a few months’ gap between when that vaccine can become more broadly available to the population.

With the additional stimulus, how much of a concern is the national debt?

Johnson: From my perspective, I think as long as interest rates remain low, we can continue to see equity markets work and continue to work well, but we’re clearly going to have to see some future tax increases put through. I think the new administration is going to be looking at all sorts of different taxes, whether it’s a financial transaction tax, whether it’s going be a higher payroll tax, whether that’s going to be a higher corporate tax. Those are the things they’re gonna have to look at and be addressed.

Paulsen: There are problems down the road from this, whether it’s higher taxes or higher inflation. In some regard, the policy question about ‘we need more to help now’ has to be considered in relation to what it’s going to do to that same group of people down the road is all I’m pointing out. Now, that’s why I do think targeted relief, rather than just gross relief from here, is probably the way to go.

How will changes in the White House and Congress affect markets and foreign trade in 2021?

Perry: Well, the only thing that right now I’m seeing change is in the White House. Because if Congress stays the same, we will have more of the same. Which I think markets will like.

Erickson: The key as far as policy going forward is what happens in the Senate. So these Georgia races coming up in January are really key because to the extent we get what we would call a blue ripple, where they do take the remaining two seats that really gives them more clear runway for changes in taxes, changes in regulation.

Paulsen: I very much agree with this concern about splitting of our political spectrum. I think that’s a real issue for this country where the middle hollows out.

One of the great things about America has always been its bell shaped political curve and it doesn’t swing from side to side. And I think you see more evidence of getting closer, closer to that event where you swing to the far right, or the far left.

Has private equity hit a peak? Can it be made available for more investors?

Royal: One of the other really important shifts in private equity that we’re beginning to see, and we’re going to see more of, is the democratization of private equity as an asset class and gradually moving from being limited to wealthy individuals and institutions and coming to retail investors. And you’ll probably see it first in things like 401(k) programs where there’s an intermediary, such as a trustee, to keep an eye on fiduciary obligations to investors, but I think it’s an important trend.

Pomerantz: I’ll take the opposite side of it, because I think that for retail investors, they need to be very careful here. It’s really only great if you can get into these top-tier firms, and so it might be best left to a certain number of people who really have the financial wherewithal to participate in that. I worry a lot about it becoming something that is open to everybody, because I’m not sure [that] is the greatest investment.

Perry: We’ve been a pretty strong private-equity investor for the last 40 years I think it’s a great asset class — but as Martha pointed out, you have to be very careful about it. We’ve had first-quartile performance pretty consistently, but you know when we compare our numbers to the broad market, we’ve been pretty fortunate. I think it has to do with what institutions have access to.

Are there going to be any long-term winners coming out of this pandemic that might be good investments in 2021?

Johnson: Being on the technical side of the world, I look at the entire market and clearly momentum is one of the factors that we’re looking at from a chart perspective. We are still thinking that we should be overweight in consumer cyclicals and tech. We see a lot of improvement happening in the industrials at this point in time. So it’s really playing into the reopening of trade. Some of the stocks that I’ll be watching are the industrials charts that look interesting. Stocks like Generac Holdings, Trex Co., Illinois Tool Works and International Paper have been names that we’ve been looking at. Also on the consumer side, stocks like Best Buy, Lulu [Lululemon Athletica Inc.], Nike, Target all look like stocks that are doing well. In technology, definitely got a bend toward some of the semiconductor names like Monolithic Power [Systems Inc.] and Nvidia.

Erickson: Over the long term, we would really continue to favor some of those secular themes that really came to prominence during the whole coronavirus onset, and so those would be technology, selected parts of consumer discretionary and also selected parts of communications. Particularly those that are more social media-related as opposed to just more traditional telecom, and the reason why is, even before we had the coronavirus, obviously our habits were already changing.

Paulsen: A couple points. One is, is that if you look back, most of the stock markets around the world have not gone anywhere since the end of 2017, and we’re all focused on the S&P 500 and FANGs (Facebook, Amazon, Netflix, Google/Alphabet) and whatnot. But the great bulk of stocks haven’t really gone anywhere for three years. I think that means the fishing pool might be broader than you think, so I do think that some of these broader market plays — whether they’re small caps, whether they’re cyclicals, whether they’re international — will probably not only do well for next year, but a number of those maybe in the next several years. I would look at micro caps next year. I think micros might pick up next year on a relative basis and then longer term, I think one play people should seriously think about is emerging markets, excluding China.

In the spirit of social distancing, are there any choices to steer clear of in 2021?

Royal: I’ve got a couple of thoughts on fixed income, we’ve got a lot of stock pickers here. We can comment on individual sectors, but we’d be underweight on long duration bonds here. In some ways It’s just the way bond math works, you know, Even a modest move higher in rates when rates are this low can cause significant negative returns in longer duration bonds.

Perry: Right now our asset allocation is 50% public equity; 25% private markets with our uninvested portion again in equities. So pretty much 75% equity focused. Fixed income, we raised it to 25% but we did some bifurcation. I try to point out to people our job isn’t to make the most money, we can. It’s to pay pension liabilities. One of the things we did back in March is something we’ve been thinking about the last few years on how to change the fixed income portfolio. So I went to the board and got permission to do it.

Johnson: I would just say this in terms of what to avoid just real quick: utilities, consumer staples and REITs [real estate investment trusts]. Those are three areas that we’re avoiding.

What is your prediction for the S&P 500 in 2021?

Erickson: I’ll start off the process by putting in 3,960, and what we’re expecting is a little drop in multiples, which admittedly are higher right now. So that’s based on a 24 times price-to-earnings multiple, with a rebound in earnings to 165. So we’re saying about a 7% gain from where we are now.

Johnson: In terms of the S&P 500, we’re looking for 4,225 for next year, and we derive it the same way we have for the past decade.

Paulsen: I think it’s going to end the year around 4,100. I think it will go higher during the year and come back. I do think that it will be some notable contraction, a little bit as the year goes on, a fair amount, actually. But I think the broader market, you know, whether it’s smalls or international or cyclicals, value, I think they do a lot better than the overall S&P 500.

Pomerantz: I would say our prediction for next year is 3,950. A key thing in this past year was staying the course when the market turned down in March, and we really encouraged clients to make sure that they felt comfortable with their current asset allocation and stay invested and that, as you know, reaped huge rewards for clients. Because had you done the bad thing and sold, you’d really be in a world of hurt at this particular juncture. Set an asset allocation that you think is going to work over some long period of time and then just simply rebalance along the way.

Perry: 4,050, and it is 8.5 to 9% over where the market is 30 seconds ago.

Royal: So this isn’t a very good “Price is Right” strategy, but my number going in, which I won’t change, is 4,080. This will be about a 20% move to the upside from pre-pandemic highs. I was going to pick 4,100, but my mother was born in 1940, and it’s her 80th birthday this month. So I’m going with 4,080.

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