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Welcome to the Roaring ’20s, but Maybe Not for Stocks

By Lauren R. Rublin

Jan. 15, 2021 9:25 pm ET

Illustrations by Helen Green

Welcome to the Roaring ’20s. When the world finally bids good riddance to Covid-19, courtesy of a bevy of novel vaccines, expect Americans to emerge from their lairs with a joie de vivre not seen since the 1920s. That’s marvelous news for the economy, which could use some cheer after a punishing year, and for the many companies that will help keep the good times rolling.

Just don’t expect the party on Main Street to spread to Wall Street, which had a rollicking celebration of its own this past year. As a consequence, stock prices are now sky-high, speculation is rampant, and the good news, as they say, is firmly baked into many shares. For stocks, alas, it could be the Boring ’20s, or at least a muted 2021.

That’s the rough consensus of the 10 investment pros on the Barron’s Roundtable who met on Jan. 11 to parse the prospects for investors, the economy, the country, and the world in the year ahead. It was a Roundtable like none other, as one might expect amid a pandemic, and in the aftermath of a blisteringly divisive election and the shocking attack on the Capitol by supporters of President Donald Trump. Among other things, this Roundtable was the first in the institution’s 53-year history to be held virtually, via Zoom.

READ MORE ROUNDTABLE

• 2020 Roundtable
• 2020 Roundtable Report Card
• 2020 Midyear Roundtable
• 2020 Midyear Roundtable Report Card

You’ll read lots of investment stuff in the edited transcript that follows: forecasts for gross-domestic-product growth, interest rates, price/earnings ratios, and the like. But arguably more compelling, this year, are our panelists’ views on the coming changes that will shape our country and culture after a once-in-100-years plague. Some will be good: expect a greater focus on reducing economic inequality and environmental abuse, and more investment in innovation and education. Some might be bad (excessive money printing, we’re looking at you). And some could be downright ugly, including the possibility of low-level civil war.

Even a perilous world and a frothy market harbor bargains, however, which brings us to the stock-picking portion of our Roundtable program. In this week’s installment, the first of three, you’ll also get nine exciting investment ideas, courtesy of William Priest, executive chairman and co-chief investment officer of New York’s Epoch Investment Partners, and Meryl Witmer, a general partner at Eagle Capital Partners, also based in New York. Few people know their way around markets better than Bill and Meryl—except for the other eight members of our illustrious panel.

Barron’s: Welcome, everyone. What a wild and crazy year it has been! And we’re not even talking about 2020, but 2021. Todd, you’ve been up with the sun on the West Coast. Give us your two cents on the economic and investment outlook.

Todd Ahlsten: First, I’d like to offer a brief reflection on just how hard 2020 was. The year was so brutal that it rocked our sacred beliefs in personal freedom, essential gatherings of loved ones, and economic security. We don’t realize how much we appreciate these things until we lose them. The damage done has been deep and broad, and it will take a long time to repair. One result is that we expect ESG [environmental, social, and corporate governance] dynamics to be increasingly important in terms of how companies treat their workers, build their supply chains, and run their businesses generally. Increasingly, we will ask what purpose business serves. This is a double-down, triple-down moment: Business is part of the solution to repairing the global economy and our social fabric. In 2021, business will play an important stabilizing role. It has to be a stabilizing force if we’re going to get to the other side of this.

Todd Ahlsten

Illustration by Helen Green

Now that I’ve set the tone, Ben Allen, my co-manager, and I are constructive on the market but see several possibly deep corrections during the year. We think the economy probably grows 5% to 6%, as monetary and fiscal stimulus and the rollout of Covid-19 vaccines lead to a recovery. There seems to be no limit to the money-printing, which is supported by both political parties. That said, we expect inflation to stay low.

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We think the market ends the year up, but there could be a correction around midyear. ”

— Todd Ahlsten, Parnassus Core Equity

People want long-duration assets, and that has boosted stock valuations. I don’t see that changing in the near term. Many people have compared this market to the speculative market of 1999-2000, but valuations of companies like Microsoft [ticker: MSFT] and Google-owner Alphabet [GOOGL] seem pretty reasonable. We look to invest in innovative, wide-moat companies solving complex problems. We don’t think the market’s recent rotation into value stocks is overly durable. The quality of many value-oriented investments has deteriorated due to technological disruptions. Large-cap, innovative companies are still the place to be.

Mario, what is your view?

Mario Gabelli: Monetary and fiscal stimulation went into hyper mode last year, and the economy began to recover after the second quarter. Now it is deteriorating again due to Covid-related lockdowns around the world. We solved other health crises, such as smallpox, SARS, and MERS, and we’ll solve this one, too. But there is also a question about how we’ll finance the federal deficit, which is approaching $5 trillion. I see some interesting challenges ahead.

Mario Gabelli

Illustration by Helen Green

When I look to the first quarter of 2022, the domestic economy looks pretty good. The Biden team will want a good economy for the midterm elections. An infrastructure bill will be announced earlier, but it will kick in around that time. Europe’s economy looks uninspiring.

Consumer wealth in the U.S. is at an all-time high. We have a problem with outstanding student loans, but the government will deal with that. The consumer will spend nicely. That’s good for the auto industry. The industrial sector looks robust. We’ll see what happens with corporate taxes. With wages rising and commodity prices spiking, companies that can pass higher costs on to customers will benefit. I expect U.S. GDP to increase 5% or 6% in real terms, reflecting a vaccine that works, continued monetary policy, and added fiscal stimulus, including a sizeable infrastructure bill that kicks in in the fourth quarter to buttress the economy in first half of 2022 in time for the mid-term election.

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Janet Yellen’s Treasury Department and Jay Powell’s Federal Reserve won’t pull back on stimulus. The economy looks good for the next four to six quarters. ”

— Mario Gabelli, Gamco Investors

On the corporate side, about 20% of companies in the S&P 500 index will benefit from a stronger euro versus the dollar. I see gross profit margins narrowing overall, reflecting higher costs for labor and PPE. SG&A [selling, general, and administrative expenses] will rise less than revenue. Pretax profits will go up nicely. Cash and book taxes will increase. And price/earnings multiples will contract, reflecting a higher 10-year Treasury yield. In short, things look OK. Janet Yellen’s Treasury Department and Jay Powell’s Federal Reserve won’t pull back on stimulus. The economy looks good for the next four to six quarters, though taxes on corporations and individuals are likely to be a headwind.

Does anyone disagree with these forecasts?

Rupal Bhansali: I’m not constructive on the markets. There is a lot of euphoria out there, and many assessments about an economic recovery in 2021 are more than priced into stocks. Some of the risks, meanwhile, haven’t yet materialized. Inflation is creeping up; TIPS [Treasury inflation-protected securities] are pricing in 2% inflation, and while I understand that the Fed will allow it to go higher than that, inflation matters for the stock market.

Rupal Bhansali

Illustration by Helen Green

As for the corporate tax rate, there is no other way but up, given record budget deficits in the U.S. That isn’t priced into U.S. stocks at all. Higher taxes are less of a risk for international markets. All of this bodes poorly for the U.S. dollar. Money was attracted to the U.S. because the stock market performed well and a strong dollar added an extra boost. The currency trend is likely to reverse. That means international assets may do better than domestic assets in the future. That’s a big reset, compared with the past decade.

The investment world has become a bit too U.S.-centric. It is popular to talk about anemic economic growth in Europe and Japan, but profit growth in Japan has been on a tear. Companies have improved their productivity and profitability by cutting costs and restructuring. They’re not dependent on GDP to grow. That is true of Europe, as well. French companies such as LVMH Möet Hennessy Louis Vuitton [MC.France], Michelin [ML.France], and L’Oréal [OR.France] have reported terrific earnings over the past several years, even though we don’t typically think about the French economy growing or France’s tax regime being conducive to growth.

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As for the corporate tax rate, there is no other way but up, given record budget deficits in the U.S. That isn’t priced into U.S. stocks. ”

— Rupal J. Bhansali, Ariel Investments

In the U.S., we are seeing broad-based signs of a market top, whether in valuations or the proliferation of special-purpose acquisition companies, or SPACs, which are blank-check companies. Multiples of enterprise value to Ebitda [earnings before interest, taxes, depreciation, and amortization] are off the charts because of the added debt that sits on corporate balance sheets post-Covid and the collapse in Ebitda. We’ve seen record inflows into risk assets such as high-yield bonds and Bitcoin, abetted by the Robinhood costless-trading syndrome. Merger-and-acquisition activity is high. All these things point to crowded trades, and investors with fiduciary responsibility need to look at what can go wrong, not just what can go right.

Abby Joseph Cohen: If we use our tool kit as analysts and economists to forecast the economy, earnings, valuations, and so on, we end up with an outlook that is OK, not great. Goldman Sachs ’ forecasts for both U.S. GDP and S&P 500 profits are above the consensus, but the risks, in my view, are asymmetrical and to the downside. The biggest concerns—Covid and political turmoil—are the hardest to quantify. The valuation of the U.S. equity market is dependent, not just this year but next, on low interest rates. Almost all valuation measures are in unattractive territory, with the exception of those linked to interest rates. I’m not saying interest rates will skyrocket, but even a modest rise, which is likely, will damage not just equity valuation, but fixed-income valuation, as well.

Abby Joseph Cohen

Illustration by Helen Green

Also, we have already seen the dollar decline on a trade-weighted basis over the past few months. That makes U.S. multinationals somewhat more competitive. But when you consider how dependent the U.S. has been on capital inflows from other places, it’s not such a pretty picture.

A few more things: Investors have breathed a sigh of relief in recent weeks about the progress made on the vaccine front, and the likelihood that the Biden administration will have a thoughtful economic policy. But let’s recognize that in the near term, the disease numbers are horrific. Even the most credible optimistic forecasts suggest it will take until the second half of 2021 before most nations get anywhere near their target vaccination rates. Some emerging nations may wait until 2022. That means the global economy will remain under significant strain.

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The valuation of the U.S. equity market is dependent, not just this year but next, on low interest rates. ”

— Abby Joseph Cohen, Goldman Sachs

When history is written, I believe we’ll find that the Trump administration’s economic policies, by and large, were damaging to the U.S. We’ll find that its trade, immigration, and environmental policies were damaging, and that many industries misused the tax cut, spending the money on share repurchases and dividend increases, instead of reinvestment for growth. I am also concerned, based on recent events, that the Biden administration might not get as much support as it needs in the House of Representatives and the Senate.

Sonal Desai: We have done a lot of work with Gallup, the polling company, over the past six months. We have found that the most important factor determining the economy’s performance is policy-driven lockdowns, or the lack of lockdowns. In the first quarter, the effective lockdown rate in the U.S. was very high, and the economy collapsed. In the second half of last year, we saw a jump in the number of Covid cases, but effective lockdowns didn’t increase. As soon as lockdowns ended, the economy roared. We are a bit more concerned than Rupal about the outlook for Europe because of the possibility of more lockdowns there.

Sonal Desai

Illustration by Helen Green

I have some concerns about inflation, but I don’t see superhigh inflation. It will move comfortably into the 2%-plus range. Short-term interest rates will hold steady, but I am worried about the long end of the yield curve. The recent move up in interest rates isn’t one-and-done. This is an issue for fixed-income investors.

Also, there has been no attention paid to the implications for financial markets of the incoming Biden administration’s proposed tax and regulatory policies. Potential tax increases haven’t been factored into estimates of future growth. My baseline estimate for GDP growth is close to 6% this year, largely on the back of massive fiscal stimulus, but I am concerned longer term about the accumulation of debt.

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My baseline estimate for GDP growth is close to 6% this year, largely on the back of massive fiscal stimulus, but I am concerned longer term about the accumulation of debt. ”

— Sonal Desai, Franklin Templeton Fixed Income

Finally, I am not as pessimistic as some about the rollout of vaccines because I remember that six months ago we thought there was zero chance of a vaccine being developed by December. Now, multiple vaccines have been developed. I expect the rollout to move quickly.

Cohen: I have had the good fortune to work with one of the major public-health groups in the U.S. since early February, and I have seen a lot of data viewed by public-health officials regarding vaccine distribution. By the end of 2021, the numbers are going to look very good. Vaccine acceptance has been rising notably. However, the rollout has been uneven and slower than expected, and that will have an impact on expected economic growth in the first quarter, and maybe even the second. Beyond that, distribution looks better.

Bill, you haven’t chimed in yet.

William Priest: We have a vaccine supply-chain problem that could be solved with a bit more technology in the distribution system. But I assume things will work out. To borrow a phrase from Queen Elizabeth, last year was an annus horribilis—a once-in-100-years horror. A century ago, we had the Spanish flu. After that pandemic passed, there was a passion for living. Today, the desire to go back to the life that we had is phenomenal. Just call up your favorite places to stay in the world and you’ll be amazed by how many of these places are already fully booked for next fall. There is an assumption that this pandemic will be in the rearview mirror by the back half of the year. To get herd immunity, you need to get 70% of Americans inoculated.

William Priest

Illustration by Helen Green

The pandemic will accelerate change in three critical areas: social justice, climate change, and innovation. With respect to social-justice issues, consider the following: Statistics show that a 40-year-old Hispanic American is 12 times more likely to die from Covid than a white American of the same age. Here’s an even more powerful statistic: 60% of jobs that pay more than $100,000 a year can be done from home, but only 10% of jobs paying $40,000 or less per year can be done remotely. The issue of inequality will have to be addressed for our country to move forward as a democracy.

I would disagree with Todd a bit; business is not the solution. In our world, the primary function of business is capital allocation, such that scarce resources can be allocated most efficiently for the greater good of society. Business is a capital allocator with a role to play in society, but the responsibility for determining the definition of “greater good,” with all its related trade-offs, lies with the electorate and its ability to create consensus.

READ MORE ROUNDTABLE

• 2020 Roundtable
• 2020 Roundtable Report Card
• 2020 Midyear Roundtable
• 2020 Midyear Roundtable Report Card

As for innovation, it doesn’t mean only technological disruption. Disruption is coming to every area imaginable, from college education to fossil fuels to traditional business models. We saw the most vivid example in the past year: Within weeks of identifying the new coronavirus, we had sequenced its genome, and now we have at least two vaccines available, with more on the way. To me, that is the most amazing event of 2020. The innovation in business models can be seen in the explosive growth of e-commerce over the past year.

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Disruption is coming to every area imaginable, from college education to fossil fuels to traditional business models. ”

— William Priest, Epoch Investment Partners

Innovation is coming in government and politics, as well. We have seen it in the expansion of fiscal policy. There is going to be a rearrangement of the deal between governments and people. How do we reset citizen expectations about what government can do for people? Without the action taken by governments in the past year, human calamity would have meant economic catastrophe. We are going to be challenged by these issues for a while. Even though last week’s riot was a catastrophe, we shouldn’t think the whole experience is over. President Trump got more than 70 million votes in the November election, and that group of people isn’t going away.

How will things shake out this year, as we grapple with these issues?

Priest: Mario noted that the American consumer is flush with cash and wants to spend it. By the second half of 2021, we could have a reprise of the Roaring ’20s of a century ago. Six-percent GDP growth is a little aggressive, as I don’t expect much inflation. Our forecast is 4% to 6%, assuming Covid-19 is behind us. We think platform companies will continue to do well. Sparkline Capital posted an excellent piece in December called “The Platform Economy.” It is a very good read.

After the Roaring ’20s came the 1930s. But we’ll leave that discussion for a future Roundtable.

Cohen: Going back to the 19th century, two factors made the difference in explaining why the U.S. went from a backwater to the planet’s leading economy, and has maintained that position for many decades. The first has to do with our labor force. Our nation was a magnet for immigration, and we need to take a careful look at current immigration policy. It has been problematic not just during the Trump administration, although the problems have intensified in recent years. In the past decade, 42% of our labor-force growth came from immigrants. Well-educated immigrants are heavily represented in our fastest-growing sectors, such as information technology and health care. Economic growth is a function of labor-force growth and productivity growth. Productivity is related to the capital/labor ratio.

With regard to capital, our investment in basic science and research and development has fallen in the past several years. The U.S. used to be No. 1 in the world in R&D spending as a percentage of GDP. Now we are No. 8, in part because the government isn’t spending as it used to in this category. Keep in mind that government-funded basic research in computers, communications, and satellites in the 1950s and 1960s was a foundation for today’s strength in IT and other digital fields. Many other nations have increased their spending on basic science and higher education, but we have cut ours back. Among corporations, which invest not so much in basic science as in R&D and production, much of this investment is now concentrated in only three or four industries, chiefly IT and pharmaceuticals.

Desai: The lack of in-person schooling during the pandemic is dramatically negative for anyone who isn’t in the upper echelon of private schooling. This is one of the most determinate factors in exacerbating income and societal inequality, and it is something in which the U.S. stands apart from other developed countries. Parents without access to in-person schooling for their children have a 12% lower labor-force participation rate. It is a negative for women and lower-income workers. Education is key in thinking about productivity.

Henry Ellenbogen: One major thing happened in 2020 that we haven’t talked about yet and that will impact us not only in 2021 but also beyond. The ways we lived and worked, and even where we lived, started to change fundamentally. This is going to unlock business innovation and long-term productivity in the U.S. I want to double-click on that. Yes, the Fed and stimulus spending did a lot to support the economy.

Henry Ellenbogen

Illustration by Helen Green

But the economy functioned throughout the lockdown and social distancing because of the role technology plays in how we live and work. The growth of e-commerce was pulled forward by several years. Services like DoorDash [DASH], which were largely part of the convenience economy, went mainstream. We invested in DoorDash when it was a private company. [The company came public in December.] DoorDash did 200 million deliveries in 2019; this year, it will do over a billion. It went from being used by nine million Americans to being used by close to 27 million. Usage broadened beyond urban environments and into the suburbs—and throughout the country.

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Technology is enabling us to spread out far more than an infrastructure bill would, and it will allow us to tap the great resource of America, which is the scale of our country. ”

— Henry Ellenbogen, Durable Capital Partners

Look at the way we’re holding this Roundtable. Zoom Video Communications [ZM] went from 10 million users to 300 million users—that’s 30-times growth. Microsoft Teams saw similar growth. This is going to unlock our ability to use video as a platform to fundamentally change the delivery of health care. We are investors in a mental-health company that is facilitating patient sessions over video. Think about how education is going to change as a result. Even the way we interact with our accountants and bookkeepers is going to change.

Gabelli: Productivity has grown more than 1% a year and is likely to remain higher over the foreseeable future.

Ellenbogen: Absolutely. Matthew C. Klein wrote a column in last weekend’s Barron’s about the coming growth in postpandemic productivity. He noted that the amount of goods Americans were able to buy from a given number of retail and logistics workers rose 10% in under a year.

One of the most fundamental trends that will come out of 2020 is that America will spread out. The first suburbanization trend started in 1810. I would argue that we are now in the fifth phase, and it is going to be as powerful, if not more so, than the first four. Knowledge workers are going to be able to separate economic opportunity from where they live. A lot of tech companies now talk about being time-zone companies as opposed to geographically based. Working from home, even for people who have to go to the office two or three days a week, will allow people to move to the suburbs and more distant places, lowering their cost of living and enhancing their quality of life. The services that accompany these workers are also going to spread out. The productivity gains will be significant. Before Covid, 10% of Americans spent two hours a day commuting to work, and 40% spent an hour. You’re going to return this time to people in the form of enhanced productivity.

Meryl Witmer: A lot of tech companies are changing the compensation levels of people who have moved from, say, New York to Florida. They might make quite a bit less by moving to Florida. That could cause some people to rethink such moves.

Ellenbogen: If people can really work remotely, competition in the marketplace will take care of compensation discrepancies. If you want to have the best employees and they can live where they want, you are going to have to pay them based on a national wage.

Gabelli: More people are going to flee high-tax parts of the country for tax-efficient areas, particularly if tax rates rise.

Ellenbogen: We see a lot of people moving to Texas and Florida. I see this spreading out as a decadelong change with significant implications for remote-service delivery, which will lower costs and lift productivity. Technology is enabling us to spread out far more than an infrastructure bill would, and it will allow us to tap the great resource of America, which is the scale of our country.

What do you expect from the economy in 2021?

Ellenbogen: There is an underlying assumption that we get decoupled from Covid by the vaccines. If that happens, there is going to be a tremendous pent-up desire for experiences and consumption. Starting this summer, we might have six months of New Year’s Eve parties.

James Anderson

Illustration by Helen Green

James, you’re listening in from Scotland. What do you make of this discussion?

James Anderson: What last year makes me think is that we all need a huge dose of humility. None of us foresaw what was going to happen. It’s not great to be confident that we know what will happen now. I had a conversation just before lockdown last March with the excellent Andy Haldane, chief economist of the Bank of England, who said, “We’ve got to realize that when we look back, the difference the 20th and 19th centuries had with prior ages is not that there wasn’t growth, but that there were many years in which we had serious setbacks, often associated with plagues.” We’ve now had two previously thought-to-be-impossible setbacks in the past 15 years, from 2008-09 to what happened last year and is still happening. That suggests both that we need to have more humility and that our economy must in some way be more vulnerable than we thought it was coming into this century.

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I think it is a race in America between all the technological changes that have taken place and, to be blunt, societal collapse. A low-level civil war in America in the next five years is the most likely answer. ”

— James Anderson

My next point, which we touched on, but perhaps not enough, is that the shift toward Asia in the global economy has accelerated only in the past 12 months. To me, that is a long-term issue. Within China, for all the initial questions about its response to the virus, the subsequent actions have been truly remarkable, and very popular. But it’s not just China. At the same time, because of the extreme hostility between China and the West, or more accurately, China and America, we are effectively forcing China to make heavy investments in core technologies, and that will only accelerate.

Finally—and please don’t think from this that I am smug about Britain; I am deeply pessimistic—I think it is a race in America between all the technological changes that have taken place and, to be blunt, societal collapse. A low-level civil war in America in the next five years is the most likely answer. That is connected with issues such as inequality and some that are more troubling than that. I wouldn’t want to be confident about which way things will break in 2021 or beyond, but it is an existential race between the good and the bad.

We would really hate to hear your views on Britain.

Anderson: Yes, you would.

Meryl Witmer

Illustration by Helen Green

Meryl, what is in your crystal ball?

Witmer: I view income inequality as more a matter of education inequality. Long run, kids have to be able to get a proper education to close the income gap. It is hard to get a quality public education in a lot of our big cities. That is a big issue that no one here is talking about. I don’t see a lot changing on this score in the near term, given the incoming administration. I think we need school choice nationally.

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People should have cash in reserve, and maybe they’ll get another opportunity to buy stocks more cheaply, as happened...last year. ”

— Meryl Witmer, Eagle Capital Partners

With regard to the economy, people like to go out. They like to go to bars, travel, and see their friends. When they are vaccinated, some parts of the economy will snap back, but that leaves less money for other parts of the economy. If you can go to a restaurant, that’s less money spent on DoorDash. But all in all, there is a lot of money sloshing around and people will spend it. Maybe less will go into the stock market, where we have seen a lot of speculation, so when you want to sell, where are the buyers? People should have cash in reserve, and maybe they’ll get another opportunity to buy stocks more cheaply, as happened in March and April last year.

Scott, how do you see the economy behaving as we head into 2021?

Scott Black: I’m a political junkie, so I watch too much CNN, MSNBC…

Scott Black

Illustration by Helen Green

Gabelli: You have no diversity in your viewing!

Black: I watch Fox from time to time. First, I think Joe Biden is a fine and decent person. The highest priority, as he has said, is taming the pandemic. We can’t forecast anything unless we do that. Second, the U.S. has done a terrible job of rolling out vaccines. The Trump administration had 10 months to get ready for this, and it has done poorly. About 10 million out of 330 million Americans have been inoculated at this point. We aren’t going to tame the virus until vaccine logistics improve.

Others here have discussed income inequality. In Dade County, Fla., one in four children goes to bed hungry. Also, we need a living wage—probably a federal minimum wage of $15 an hour—and another stimulus bill. I know the federal debt is $27 trillion, or 130% of GDP, but the Fed can print money and needs to, because people are in trouble. Also, we’ve got to help state and local governments. They have to balance their budgets. When they don’t have revenue coming in, they have to cut services and personnel—police and firefighters and teachers. That’s not acceptable.

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I see real GDP growing between 4% and 5% in 2021. Inflation will be somewhere around 1.8% to 2%. ”

— Scott Black, Delphi Management

What does this mean for the economy? I don’t have a GDP model, so I’ll go with what Fed Chair Jay Powell said. He forecast that the U.S. economy would grow 4.2% this year and said the Fed would remain accommodative. The Fed is on track to buy $120 billion of securities a month. Its balance sheet already ballooned from $4 trillion to $7 trillion-plus last year. We don’t have to worry that the Fed is going to stand in the way of the economy. I see real [inflation adjusted] GDP growing 4% to 5% in 2021. Inflation will be somewhere around 1.8.% to 2%.

Let’s go around the “table” and get everyone’s stock market forecast.

Black: Using the S&P 500 as a proxy, stocks could rise 8% to 10%. Dividends will add another 1% to 2%. There is a lot of liquidity in the system, there are no good alternatives to stocks, and corporate earnings are likely to rise 37% this year, to around $165.

Gabelli: The market will hit a big air pocket when we have to deal with Iran and North Korea. On the other hand, the Biden administration will want to enact policies that help the Democrats win the midterm elections. I expect the market to have a strong first half, but end the year flat to slightly up.

Henry, your thoughts?

Ellenbogen: It’s hard to predict the short term because of the issues we’ve been discussing, including technological change, inequality, and market structure. My base case is that the economy will get considerably better in the second half of the year, but a lot of the improvement is already in stock prices. The outlook for inflation, our relationship with China, and how we deal with domestic tensions will determine the market’s direction.

Desai: It is not a year when we can just look to GDP growth as a guide, because valuations seem very stretched. I’m not an equity person, but I think the markets will do better in the first half than the second half, when there will be increasing concerns about issues such as tax hikes. I see a flat-to-slightly-up year for stocks, with a continued broadening in the list of winners. Only six stocks accounted for most of the market’s gain during much of 2020.

Cohen: Sonal made some of the points I was going to stress. The S&P 500 is not the whole market, and the stock market isn’t the entire economy. We are seeing divergences within markets between stocks that have done extraordinarily well—in part because profits of the underlying companies have done well—and stocks that have been struggling. There has been a similar unevenness throughout the economy.

Goldman Sachs is forecasting that the S&P 500 will rise in the high-single digits in the coming months, but with notable volatility. In 2020, volatility levels were almost as high as during the 2008 financial crisis. Our team sees the index reaching 4100 to 4300 in the second half of 2021, based on expectations of a more stable economy in 2022. Most valuation measures are stretched and may not offer support in the face of unpleasant surprises.

Priest: Stocks could rise 6% to 8%, but the better question is the range around that outcome. History suggests plus or minus 35 percentage points! That tells you how diverse the possibilities are. I’ll go with 6% to 8%, but that’s a low-confidence number.

Witmer: I’m not constructive on the market. Joe Biden has said he wants to raise corporate tax rates. If he can do so, that’s a good minus-10% hit to future earnings. Incremental regulation will make things tougher, as well, and stocks are highly priced.

James, your thoughts?

Anderson: It is a random walk, and I haven’t a clue.

At least you’re honest. Todd?

Ahlsten: The question is, when do we hit the wall on MMT? [Modern monetary theory posits that governments that control their own currency can print as much money as they need without becoming insolvent.] Both political parties seem to be adopting this theory. We think the market ends the year up, but there could be a correction around midyear. People will start to question the outlook for pent-up demand, further fiscal stimulus, and interest rates. Will the Fed keep its foot on the gas pedal? I’m expecting a potentially steep correction, which may be met with more money-printing and large fiscal stimulus.

Cohen: The volatility and correction that Todd refers to could also afflict the fixed-income markets.

Bhansali: I want to take people back to 2019 before we go to 2021. In 2019, markets rose about 25%, so we were already paying more for stocks and getting less in exchange. Last year, there was a dramatic downward reset in corporate earnings, and yet the markets rose again. Paying more for less is not a good investment proposition. We are now into speculative territory. People get caught up in confirmation bias, and I respect James’ point of view that it is extremely hard to predict markets in the short term. But the increase in stock prices relative to the deterioration in fundamentals bodes poorly for the valuation and performance outlook on stocks, not just in the next 12 months but also for the next decade. We will need to seek absolute investment returns in unconventional places and ways. Investing will be much more about generating idiosyncratic alpha than relying on market beta.

Let’s go back to China. Do you see America’s growing rivalry with China as a broad market risk, or as a risk to select market sectors?

Anderson: It is a combination of the two. China is trying to apply considerably more regulation to anything we might label technology- or e-commerce-linked, but companies and governments will respond to that based on their own internal habits.

The U.S. also is making it much more difficult to own some Chinese stocks. How will that play out?

Gabelli: We were threatened by brokers who said that if we didn’t sell [Chinese] telecom stocks, they would cut off distribution of our mutual funds. It makes the guys in Edinburgh laugh all the way to the bank! I expect President-elect Biden to make nice to China’s president, Xi Jinping, to try to solve this problem. China’s consumer sector of its GDP will grow from around 45% to 60% of the Chinese economy, providing a long runway for real growth in the next five years, and even discounting the political issues, investors should be there.

Desai: Some of the views about China are a little sanguine. We tend to forget that the Democrats tend to be somewhat more protectionist than the Republicans. There is broad-based cross-party support to continue taking a pretty hard line with China. How policy is communicated may be normalized, but I would be somewhat surprised to see a massive reduction in tensions, not just in terms of tariffs, but also in overall U.S. policy toward China.

Anderson: That may well be right, but the long-term consequence is that China will develop its own technology industry in a much bigger way than before. As far as I can see, there are only two companies in the world that the Chinese administration believes it needs access to. One is Taiwan Semiconductor Manufacturing [TSM] and the other is ASML Holding [ASML]. Neither is an American company.

Taiwan Semi is the global leader by far in the semiconductor industry. It has already effectively knocked Intel [INTC] out. China doesn’t itself have the capacity to recreate what Taiwan Semi does. We all know the tensions and the difference in attitudes toward reincorporation of Taiwan into China. If you combine that with Taiwan Semi being the ultimate company that creates value and magic in the world at the moment, it is an issue that’s not going to go away.

James, at the risk of injecting more politics into the discussion, your prediction of a low-level civil war in the U.S. for the next five years was rather disturbing. It is difficult to predict such things, but how do you see this playing out?

Anderson: Thank you for giving me the out. History shows, whether in America in recent years or globally, that once you enter a period in which there is profound social and political division, and profound disrespect for truth, that tends to carry on and multiply until you have a denouement to the system. We can still see those tensions increasing. The likelihood is that this will continue for at least another five years, until you see social and demographic change.

Priest: I think James is correct. Some of the people involved in last week’s attack served our country in the sense that they were in the military. The background book on this topic was written several years ago by Joan Williams, a professor at the University of California Hastings School of Law. The book is called White Working Class: Overcoming Class Cluelessness in America.

Prior to writing this book, Williams wrote an article for the Harvard Business Review, published in November 2016, that became one of the most widely read articles in the history of HBR. The book is short; you can read it in an afternoon. It explains the psychology behind some of the people supporting President Trump. If we don’t fix some of our societal problems, I’m not sure we will have the sort of democracy we have been used to.

On that note, let’s move on to your stock picks. Bill, you have the floor, so tell us what appeals to you this year.

Priest: My first pick is T-Mobile US [TMUS], the wireless provider. The simplest networks, like web portals, are centralized suppliers that broadcast information to a large number of users. A network’s value grows in proportion to the number of users. Almost all audience measurement techniques have followed this rule since the birth of broadcasting. Transactional networks, however, which connect individuals one-on-one, are more complex, and more valuable. The least well understood but most valuable network resembles the internet and includes B2B exchanges or group-forming networks. Its value increases exponentially by all the number of possible groups. This is the definition of total addressable market, or TAM.

The 5G upgrade path and infrastructure of T-Mobile will accelerate this sort of group-forming activity. 5G is mobile broadband. It uses software to replace hardware to manage the network and its resources; it connects edge-computing devices with the cloud, and enables multiple networks to form on top of the user layer. In other words, it enables the creation of an end-to-end virtual network of networks, encompassing not just networking but computing and storage functions. T-Mobile’s midlayer spectrum—the most useful and valuable layer of 5G spectrum—and standalone network should not only allow it to gain share of plain-vanilla 5G adoptions, but also position it ahead of competitors to capture revenue growth.

William Priest's Picks

Company / Ticker	Price 1/8/2021
T-Mobile US / TMUS	$135.06
Amgen / AMGN	238.49
NextEra Energy Partners / NEP	79.76
Nike / NKE	146.35
Arista Networks / ANET	306.12
Walt Disney / DIS	$178.69

Source: Bloomberg

The biggest opportunity for T-Mobile will be in the transition from providing solely mobile connectivity to becoming an edge platform for developers, with the cloud acting as a mere extension for edge computing and storage. Edge devices are likely to perform more specialized processing near the data sources, with the cloud being tasked when latency is less of an issue. New-use cases include private networks, ultrareliable and low-latency communications, enhanced mobile broadband, and massive-machine-type connectivity.

What does all this mean for T-Mobile’s stock?

Priest: As Bob Dylan once sang, “You don’t need a weatherman to know which way the wind blows.” The wind just started to blow toward the edge in the world of enterprise technology, and T-Mobile is well positioned to capitalize on this change. The merger with Sprint gave it a surfeit of 5G spectrum. The unit economics of T-Mobile’s 5G SA network are superior; costs should rise in a linear fashion with the slope flattening, while revenue growth should accelerate on a much steeper slope. We expect T-Mobile to earn around $3.40 a share this year, $5.90 in 2022, and $8.30 in 2023. Free cash flow will rise to the $18 billion to $20 billion range over three years and yield an equity value of roughly $225 per share, compared with the stock’s recent $135. It’s my favorite idea.

Amgen [AMGN] is another of our favorite stocks. It is trading around

$230 a share. It is a leader in biotech-based therapeutics, with expertise in cancer and renal disease. But the future for Amgen is in biologics [medications made using living organisms] and biosimilars [biologics that resemble other biologics], used to treat a range of diseases. Amgen is one of a limited number of companies with both the technical expertise and manufacturing capacity to take advantage of the patent expirations coming in biologics. The resolution of Enbrel’s double patent litigation [Enbrel is an Amgen product used to treat autoimmune diseases] and the acquisition of Otezla from Celgene in 2019 allowed Amgen to capture all the growth from its established products.

Unfortunately, investors’ focus in the past year has been on the skew of the early-stage pipeline, and high expectations for certain late-stage products. We expect the stock’s performance to turn around as investors refocus on Amgen’s manufacturing prowess and the TAM for biosimilars.

What is the earnings outlook?

Priest: Amgen consistently generates significant free cash flow. It has a strong balance sheet, and focuses on paying attractive and growing dividends and making significant annual share repurchases. This year, the company could earn $16.75 a share. Earnings next year will be around $17.75 to $18. The free-cash-flow yield is 8%. We expect to see valuation multiples expand this year. The upside for the stock could exceed $350 a share. The dividend yield is about 3%.

Next, NextEra Energy Partners [NEP] was formed by NextEra Energy [NEE] to own, operate, and acquire clean-energy projects in the U.S. These include wind and solar projects and natural-gas infrastructure assets in Texas. NEP came public in 2014, and the investment thesis is built around the notion that clean-energy projects will replace aging fossil-fuel plants, to meet state requirements and as the competitiveness of clean energy increases relative to other fuels. NEP focuses on high-quality, long-lived projects operated under contract by third parties.

NEP foresees stable cash flows. The dividend has grown at a compound annual rate of 20% over five years and 15% over three years. The company’s stated objective is to grow its annual distribution by 12% to 15%. Since converting to a corporation for federal tax purposes several years ago, all of NEP’s cash distributions have been a return of capital, creating an attractive deferral of tax payments for common unit holders. This is an attractive investment, as the incoming Biden administration emphasizes climate change, but we owned it before the election.

What does NEP yield?

Priest: We estimate a 2022 year-end dividend run of rate of $3.15 a share, which assumes a yield of 3.5%. Our two-year price target is around $90 to $100 a share. The stock is up about 17% year to date, to a recent $78, but we still like it. Downside risk is probably no more than 4%. NEP trades for just under 15 times enterprise value to 2020 Ebitda, which we put at $1.5 billion. Earnings could be $2.20 a share in 2021, $2.50 in 2022, and $2.75 to $3 in 2023. But the key is the free-cash-flow yield, which goes from 4.4% to 5% to 5.7% over the next few years.

“We see Nike earning $3.10 a share in fiscal 2021, $4.50 in fiscal ’22, and $4.80-plus in fiscal ’23.” —William Priest

Illustration by Helen Green

My fourth pick is Nike [NKE], which dominates the footwear market in many key categories, including running, basketball, soccer, and men’s and women’s training and action sports. The brand is exceptionally strong. It has been built over three decades, and benefits from endorsements, sponsorships, and traditional advertising. It is in the early stages of a transition from a wholesaler model, selling to business, to a digitally led direct-to-consumer model. With its Consumer Direct Acceleration strategy, Nike aims to create the marketplace of the future.

China accounted for 18% of Nike’s sales in fiscal 2020 [ended May 31]. As of the most recent quarter, China represented a touch over 20% of total sales and had the highest profit margins among Nike’s markets. Health and wellness and casualization trends are strong in China, as in the U.S. Nike generates high sustainable returns on invested capital, which continue to expand as the business scales. The company is an example of the substitution of bits for atoms, one of our key investment themes, and digitization will drive the next phase of growth. We see Nike earning $3.10 a share in fiscal 2021, $4.50 in fiscal ’22, and $4.80-plus in fiscal ’23. Free-cash-flow yield is only 2% to 3%, but the fundamental business is extremely strong, and we are going to see multiple years of profit-margin improvement.

Do you have a price target for Nike?

Priest: The stock is trading around $146. It could trade near $200 in 18 to 24 months.

Arista Networks [ANET] trades for about $300 a share. The market cap is $23 billion. Arista is a leading provider of cloud-networking solutions for data centers and computer environments. It sells hardware products and software solutions, including ethernet switches, pass-through cards, transceivers, and enhanced operating systems. The company has been gaining market share in data-center switching due to the architecture of its platform, which has proved more scalable and programmable than competing solutions from Cisco Systems [CSCO], all at lower cost. In addition, Arista’s use of merchant silicon and open-application programming and interfaces has allowed it to maintain its first-mover advantage in technology transitions. It essentially has provided better speed at lower cost, with architecture that is easier to manage.

The company could earn $10.15 a share this year, $11.80 in 2022, and $13.40 in 2023. Free-cash-flow yield is around 4%, and we think it is going to rise to 5% to 6%.

Arista had a tough year. Facebook [FB] and Microsoft account for 30% to 40% of revenue, and Facebook’s spending growth paused in the fourth quarter of 2019 as the companies digested unused data-center capacity. This is a temporary situation, and it created an attractive valuation.

The last stock I’ll mention is Walt Disney [DIS]. I also talked about it last year. I felt like an idiot when the stock later sank as Covid spread, forcing many of Disney’s businesses to close, but then it had a wonderful rebound. It is a stock to own for the next 10 years. The company will do phenomenally well if we can get past Covid. Disney’s new streaming service, Disney+, signed up 73 million subscribers globally in less than a year, well ahead of guidance. Direct distribution of content has enabled Disney to reduce its reliance on third parties, creating significant value, although self-licensing creates some risk. Disney can diversify this risk by driving collective business success and growing its share of the intellectual-property revenue stream, rather than optimizing the returns of any one character, title, or franchise.

We expect Disney to earn a dollar a share in the fiscal year ending in September, $5 in fiscal 2022, and maybe $6 in fiscal ’23. Free-cash-flow yield will stay low, but this is a unique property with amazing opportunities. Disney could still securitize its real estate assets—its hotels and resorts.

Thanks, Bill. Meryl, you’re next.

Witmer: My first pick is a large-cap, Viatris [VTRS]. It sells for $18.30 a share. There are 1.215 billion shares outstanding, and the market cap is $22 billion. Viatris was formed last year by the merger of Mylan and Upjohn, which was Pfizer’s [PFE] off-patent branded-drug business, selling stalwarts like Viagra, Lyrica, and Xanax. The combined entity sells generic and off-patent branded drugs, biosimilars, and some active pharmaceutical ingredients, or API. Forty percent of the 23 million people treated for HIV use a Viatris product.

Because Mylan’s management wasn’t a favorite of investors, many investment firms aren’t considering the stock. That created an opportunity. Investors didn’t like that Mylan didn’t sell itself to Teva Pharmaceutical Industries [TEVA] at a much higher price. The company’s EpiPen problems are well known. While Mylan management will have the chairman and president positions at Viatris, Pfizer executives are in the CEO and chief financial officer positions. That will make investors more comfortable over time.

Meryl Witmer's Picks

Company / Ticker	Price 1/8/2021
Viatris / VTRS	$18.30
Houghton Mifflin Harcourt / HMHC	3.64
LafargeHolcim / LHN.Switzerland	CHF 52.54

Source: Bloomberg

Also, the price pressure we saw in generics has largely abated and given a more solid base to earnings. Viatris should have revenue of $18 billion to $19 billion this year, and

Ebitda of $5.7 billion to $6.5 billion. That’s a large range, but there are several moving parts, with a couple of products perhaps coming off patent, and some other issues on the headwind side. We think using the low end makes sense. On the tailwind side, there will be cost synergies and pipeline launches.

Viatris’ capital-spending needs are low, in the $300 million to $400 million range. With about $24 billion of debt, the company should have interest expense of about $800 million this year, but that should go down each year. The company’s goal is to have a debt-to-Ebitda ratio of about 2.5 times. I applaud management for having no plans to buy back stock until it achieves that ratio. We estimate that about 70% of revenue and earnings come from outside the U.S., so the recent fall in the dollar is helpful.

We expect Viatris to have adjusted earnings this year of $3.50 to $4 a share, and pay a dividend equal to 25% of its trough after-tax free cash flow. The company will have an investor day on March 1, when it will take investors through its near-term expectations. It is possible they will sandbag the numbers, so we have room to add to the position. I recommend that stance.

Gabelli: The combination of Mylan and Upjohn was structured as a Reverse Morris Trust. When the deal happened, many exchange-traded funds owning Pfizer received Viatris and had to sell.

Witmer: Those sales created an enormous supply of stock around the $16 to $18 level. We were in there buying. We expect Viatris to pay a dividend of 75 to 80 cents a share, for a yield of more than 4%, although it may take a year to get that payout. Over the next few years, there will be some loss of exclusivity on branded drugs, but there will also be savings from the cost-cutting and interest expense, and hopefully some benefit from the pipeline. We see multiple expansion from a lower-risk balance sheet and minimal further fall-off from on-patent drugs. Earnings may be better than flat, but I want to keep expectations grounded. Viatris should earn at least a nine price/earnings multiple, which would get us a double on the stock.

What is your next idea?

Witmer: Houghton Mifflin Harcourt [HMHC] trades at $3.65 a share and has a market cap of $460 million. It had about $700 million of debt and $270 million of cash as of Sept. 30. I recommended Houghton in 2015, and Abby recommended it in 2017. CEO Jack Lynch joined in 2017. He was previously CEO of Renaissance Learning, which sells educational products to teachers and students. He moved that business toward a software-as-a-service model, adjusted prices, and made some resource and people changes. Revenue and profit margins increased, and the business was sold for a large profit. Equity investors made about four times their money. Lynch thinks of himself as a transformation junkie and views the opportunity at Houghton as tremendous. The company is one of the largest textbook publishers in the K-12 space and has a great footprint in the schools. He wants to transform Houghton from a publisher to a learning-technology company.

Houghton Mifflin Harcourt trades at $3.65 a share and has a market cap of $460 million.

Illustration by Helen Green

Houghton sells core textbooks and workbooks, both hard-copy and online, and extensions—or supplemental learning materials—that evaluate where the student is and target weak areas with computer-adapted learning modules. In the recent Texas English language arts adoption, there was a 93% attach rate of extensions to the basic package. We have heard from teachers in Texas using the materials that they are fantastic. Houghton has about a 40% market share in Texas in English language arts. We also heard that in the recent evaluation process in Florida, where each county chooses three publishers from which the schools can buy, Houghton made the cut in every county but one.

Houghton has updated its products and should continue to garner business. A key evaluator of the product, edreports.org, gives the company very high ratings. The competition in core products is mainly Savvas, formerly known as Pearson. There are more competitors in the extensions, but Houghton is the only company in both.

The stock had a rough year. Why?

Witmer: States pushed out choosing a new platform, partly due to Covid. We expect more funding from government for education. The key issue with moving students online is that the one-computer-per-student ratio is very important for the adoption of these products. With the schools moving to remote learning, that issue has largely been solved.

Houghton was able to make smart cost cuts during the slowdown, and has lowered its breakeven to about $1 billion in revenue from $1.3 billion. At $1.2 billion of revenue, it should earn after-tax free cash flow of about 75 cents a share. At $1.4 billion, it should have about $1.50 a share in after-tax free cash flow. Houghton has a lot of goodwill amortization, so we add back about 70 cents to reported earnings. If Lynch generates revenue in the $1.2 billion to $1.4 billion range, we see the stock trading at $10 to $18 a share in a couple of years.

Any European picks this year?

Witmer: We still like Lafarge Holcim [LHN.Switzerland], which I recommended last year. It should benefit from more infrastructure spending.

Gabelli: Did you like the deal to buy Firestone Building Products from Bridgestone Americas?

Witmer: Yes. It should add about 35 Swiss franc cents a share [$0.39] to our earnings and free-cash-flow estimates within three years. We see LafargeHolcim earning CHF3.65 this year, going to CHF4.10 in 2022. Our free-cash-flow-per-share estimates are now CHF4.70, going to CHF5.10. The stock is at CHF51.50. The company has a terrific new management team and supplies cement, concrete, and aggregates all over the world. It should benefit from stimulus in the U.S. and Europe, and China is going strong again. At 10 times next year’s free cash flow, it offers good value.

Thank you, Meryl.