While it’s hard to believe 2020 is almost over, the big financial networks are now asking me for my 2021 market outlook. I’ll tell you what I told them: Wall Street as a whole has hit a wall.
On one hand, you have the bulls talking up vaccines as relief for a weary economy. In their view, the S&P 500 can rally another 10-15% in the coming year and the Dow Jones Industrial Average has significantly more room to catch up.
After all, these market benchmarks are largely tied to the brick-and-mortar world, which took a big step back when the pandemic locked the country down. In the grand scheme of things, it’s their turn to dazzle investors with what looks like dramatic year-over-year comparisons.
Last year was an existential stress test for whole industries. The coming year will feel amazing by comparison.
But that’s where the other end of my “Wall Street wall” theory emerges. A lot of that hope is already priced into these stocks. Maybe they can rally another 10-15% like the bulls say.
Meanwhile, the Big Tech behemoths that led the recovery look tired. They could just as easily drop 10-15% before getting back to work.
And as heavily weighted as Apple Inc. (NASDAQ:AAPL), Amazon.com Inc. (NASDAQ:AMZN) and company have become, any drag on that side will be hard for the market as a whole to resist.
The NASDAQ Composite is especially rich in technology. My base case is for that benchmark to drop a net 3-5% over the next 12 months, with some potentially jarring lurches along the way.
Zero-sum years are almost as bad for most investors as downswings. Dead money is a drain on patience and creates opportunity costs as well as a whole lot of dithering.
I personally don’t mind because I have other ways to make money even when the market as a whole goes nowhere. Let’s review three of them today.
- Trade the Cycle
Even a flat end-to-end trend usually resolves into multiple up-and-down segments. If you’re a long-only investor, you obviously want to buy after the dips and sell after the rallies, keeping money circulating.
Options give us a mechanism for making money on both sides of the cycle. As you know, calls are bets that the underlying stock will go up, while puts become more valuable as the stock goes down.
People who buy and hold a stalled stock may see their net worth go up and down, ultimately going nowhere. My 2-Day Trader subscribers almost never waste time without me providing a steady flow of usually profitable trades.
Whole sectors can go nowhere or at most move a few percentage points. It doesn’t matter. Options act as a force multiplier, parlaying what would otherwise be a tiny win into something substantial.
Day by day, with the right discipline, those tiny wins in an otherwise stalled market have added up to a 70% annualized run rate in this COVID-19 year. Unless you were in AAPL and AMZN, that’s hard to turn down.
And because it’s a market-neutral system, it doesn’t matter what AAPL and AMZN do next year. I seriously doubt they’re going to surge another 70% in 2021.
- Make the Great Rotation
Meanwhile, the Fed’s gigantic thumb remains pressed firmly on interest rates. If you’re a company in trouble, cheap money is a lifeline. But not even the Fed can cut rates again.
Fed Chairman Jay Powell and his central bank cronies are already hard pressed to keep the cash flowing. They’ve done all they can.
Don’t count on another Fed handout in 2021. For that matter, don’t count on bonds to keep ahead of inflation before 2023 at the earliest.
That’s where dividends come into my flat market hypothesis. Even if a stock goes nowhere, quarterly payouts help to turn a zero year into something positive.
But when bond dividends drop below the inflation rate (thanks, Fed), that zero year is more likely to lock in a negative real return. Enter what I’m calling the Great Rotation out of bonds into dividend stocks.
How big a role do bonds play in a typical portfolio? Why leave 40% or more of your capital in negative-yielding assets when better opportunities exist?
That’s where my Value Authority portfolio shines. We aren’t extremely ambitious, but as bond replacements, we’re doing extremely well simply to lock in a few percentage points and remain open to additional upside.
- Stick to Real Growth Spots
And finally, you’re never a prisoner of “the market” as a whole. When you want growth and other stocks look overvalued, there are always hot spots and cold ones.
In a year when Big Tech isn’t actually growing like it did in its prime and the rest of the economy is in the tentative stages of a rebound, new stocks are my favorites.
They’re small, so every $1 they bring in moves the growth needle on a percentage basis. With the Silicon Valley giants, it takes $50 billion or more just to add up to a rounding error.
When they get going, they move fast. Chewy Inc. (NASDAQ:CHWY) just hit $100 this week. The long-term ceiling is still open.
Some parts of the market aren’t crawling at all. This is racing gear.
Click here for my thoughts on the Wall Street Wall in this Bloomberg Radio segment. I’m talking more about IPOs on my Millionaire Makers radio show. Now there’s a podcast (Spotify)(Apple) as well to keep you focused on opportunities to build real wealth while avoiding obvious threats.