2021 Equity Target Achieved

Over the years, Clearwater Capital Partners has maintained the discipline of establishing specific targets for a variety of economic indicators and capital markets.  These forecasts are intended to bring practical application and transparency to our economic thesis.  Our predictions revolve around highly recognized measurements and indexes; and this tradition provides our readers with a straightforward means by which to monitor the efficacy of our outlook.

Just last Friday we reached an important milestone in our ongoing process.  Our 2021 equity targets called for the S&P 500 to reach 4,500 and the Dow Jones Industrial Average at 36,300.  As of August 27 the S&P 500 closed at 4,509.37 and the Dow at 35,455.80.  The S&P 500 has reached our 2021 goal and is now more than 21% above where we started the year.  While the Dow still has about 2% to go to reach our target level, it is up 17% year-to-date.   

Our constructive view for equity returns in 2021 was predicated on our expectation that the war on COVID-19 would progress to where the U.S. economy could begin reopening by Memorial Day.  Accordingly, we believed this “great reopening” would emerge as the dominant economic story for the year, with economic growth approaching 7% for the year.  For the second quarter, the U.S. economy advanced an annualized 6.6% on quarter and by some measures, this momentum continues to accelerate.  Corporate profits, on the other hand, soared at a 44% annualized rate in Q2, and are now at a new all-time high.

While it is always gratifying to realize the targets we publish in our reports, the actual target level itself is of much less value than the directional significance of our predictions.  We correctly believed the economic rebound would produce historically strong earnings growth and this profitability would meaningfully lift stock prices as the year progressed.  Given this expectation we designed portfolio strategy in ways that would benefit from this scenario.  As we cross through these target levels, our economic thesis and strategies for the year are validated.

Our attention now must turn to the balance of the year and 2022.  While some analysts doubt the staying power of the economic rebound, our view is that economic activity will remain above trendline levels for the next 12 to 18 months.  If we are correct, in the coming months the narrative will again shift and consensus expectations for the coming year will be adjusted higher.  It is reasonable to conclude that such a reset could push equity prices higher still.

Following last week’s meetings at Jackson Hole Wyoming, Fed chairman Jerome Powell said "the pace of the recovery has exceeded expectations..." while insisting that he is in no rush to raise interest rates.  We are beginning to see more Fed participants talking about the first rate hike occurring in late 2022, whereas most were leaning to 2023 just a few months ago.  Still, the threat of higher rates remains quite low for an extended period of time.

To be clear, there are negative factors to consider. Inflation rates have been heating up and an additional $3.5 trillion of government spending in a so-called "infrastructure" reconciliation bill would eventually represent headwinds to economic expansion.  Recent developments in Afghanistan are unsettling and the geopolitical landscape could be deteriorating beyond what we currently comprehend.  While these complications are long-term in nature, over the short-term we also have seen market breadth deteriorate somewhat and the S&P 500 has gone over 200 days without at least a 5% drawdown.  Notably, September is historically the worst month for stocks in terms of average performance in what is often referred to as weak seasonality.

This troubling mix of unfavorable dynamics would suggest that equity markets are vulnerable to near-term instability as we finish 2021 and move towards 2022.  Investors must recognize, however, that corrections are a normal part of equity markets and volatility is simply the price we must pay to achieve superior long-term returns.  We expect any market consolidation would be transitory in nature and none of these near-term concerns should be taken as a “get out” signal.   

Putting it all together, we see further upside for equity prices over the final four months of the year and into 2022.  Accordingly, we are raising our year-end target for the S&P 500 to 4,815 which represents an additional 7% upside from current levels.  For the Dow Jones Industrial Average, we believe 37,775 is possible.  Our view is that equities represent an attractive asset class, even as prices continue to rise.  These targets may not be achieved by the end of the year, however we feel strongly that we will see these, and higher levels, over the next 18 months.     

As always, thank you for your continued confidence, especially during challenging times.  From the very inception of our firm, our goal has been to bring clarity to a complex world.  We hope our Thought Leadership communications have been helpful to you as together, we navigate critical wealth management decisions.