WHERE TO INVEST IN 2021

With the election in the rearview mirror, investors can turn their full attention to the economic recovery and progress on the pandemic.

- ANNE KATES SMITH

How can the outlook for anything in 2021 not be an improvement on 2020? Stocks are certainly poised for a strong performance as progress combating the pandemic, an economy on the mend and strong corporate profits pave the way for continued gains. Rotten year though it was, however, in the end, 2020 may be a tough act to follow for investors.

Since our last investing outlook, the S&P 500 index has gained 15%, or 17% including dividends. For 2021, we’re looking for returns more along the lines of high-single-digit to low-double-digit percentages. But if we’re wrong, it will likely be because we’re too conservative. (Prices, returns and other data are through November 6, when the S&P 500 closed at 3509.)

The new year will be transitional in many ways. When it comes to your portfolio, that means a mix of old and new leaders may work best. Large, U.S. growth-oriented stocks—which ironically do best when overall economic and profit growth is tepid—still have much to recommend them while the economic recovery is nascent and uneven. And many are in industries you’ll want exposure to for the long term. But in 2021, it will pay to bet on the recovery, with economically sensitive stocks, small- and midsize-company shares, and overseas holdings, particularly in emerging markets.

“My expectation is that 2021 will be a tale of two markets,” says Kristina Hooper, chief global market strategist at Invesco. The pivot from one to the other will depend on broad distribution of an effective vaccine, she says— an inflection point that investors grew decidedly more hopeful about following recent good news on a vaccine being developed by pharmaceutical giant Pfizer and biotech firm BioNTech.