Hello everybody, it's Sam from Financial Samurai and happy 2021. Hopefully everybody made it through 2020. That's not something we should take for granted given all that has happened. But I'm still here and hopefully most of you are still here as well. We had a really good 2020 in terms of our investments, but in terms of lifestyle, not so much.

So in this episode, I want to talk about my 2021 forecast for stocks, bonds, the 10 year bond yield and real estate. I'm assuming stocks, bonds and real estate makes up a majority of your net worth. It does for me about 70%. So that's what I'm going to focus on.

So let's get started because 2020 was a great year. The S&P 500 was up 16% and the Nasdaq was up about 42%. I mean, it is crazy how much wealth has been built, at least here in the San Francisco Bay Area. I talked to my friends who play softball and a preschool friend of mine is up like a couple of hundred thousand dollars because of his Tesla investment.

And I can't imagine how much people who actually work in tech have made. We saw some really big IPOs. The latest one was Airbnb. They raised money at an $18 billion valuation at the bottom of 2020. And then it IPO at $50 billion and then it doubled to $100 billion.

And that firm employs several thousand people. So it really feels like there's a big dichotomy between the investor class and the non-investor class. And I hope all of you guys listening and reading Financial Samurai are part of the investment class. And if you weren't in the investment class in 2020, that you strategically and confidently leg into the market and try to build your wealth through investments.

There are no guarantees in investments. I'm doing my best to try to forecast things because I'm putting real money to work, guys. Real money to work because it's really meaningful to support my family. Now, I'm not just talking jibber jabber and just pontificating for the fun of it. It's the same thing with writing.

I'm not writing just to write for fun. I am putting in real money that I have saved, that I've worked hard to create so that I can provide a better life for my family and stay free. And here's an inside tip for those of you who want to continue listening to this podcast or reading Financial Samurai.

I don't reveal everything that I do. At the end of the day, I like to protect my private life. So I talk about maybe 25, 30% of the things that I think about and I like to do. And the rest, I just respect my family's privacy. However, a lot of the things that I do write about are things that are on my mind.

They are things that I'm actually probably going to do. I won't say that I'm doing it exactly, but just know that, let's say, if I'm thinking about writing about real estate in 2021, and if I'm bullish, I'm probably going to be buying real estate before things take off. That's just the way I am.

I try to say and write what I believe in and then take action accordingly. So let's start with the 10-year bond yield. The 10-year bond yield is the risk-free rate of return. And everything, I believe, starts with the 10-year bond yield. Once you've made a proper forecast of the 10-year bond yield, you can then proceed to make your appropriate investments.

So if you've been reading or listening to Financial Samurai since 2009, you know that I've consistently believed the 10-year bond yield would stay low or keep going lower. America has contained inflation for the most part. We've learned from many previous economic cycles. We have globalization where inflation or deflation is imported.

Technology makes information flow instantly. And the Federal Reserve boards around the world are all globally coordinated. So with this in mind, I do believe the 10-year bond yield will increase in 2021 back up to an average of about 1.25%. So we got down to about 0.51% in 2020. That's the record low.

And we've rebounded since. By the end of 2020, we were at about 0.91%. So I'm talking about going from 0.91% to about 1.25%. I don't believe the 10-year bond yield will breach 1.5%. Once we take a step function down in rates, it's really hard to move back up due to expectations.

It's kind of like lowering taxes. Once you start lowering taxes, the population expects taxes to be low. The smart, smart population will put aside reserves for future tax hikes. But it's just one of those things where once you start, it's hard to go back. I also believe the aggregate bond market will have a flat year.

You can see a situation where the aggregate bond market index will be flat by principal values going down, but being made up by bond yields. It's not going to be an exciting year for bonds, I don't think. So therefore, you may want to be trimming your bond positions or just not expecting bonds to do much at all for you and for your net worth.

Now let's move on to my S&P 500 outlook for 2021. I believe it's going to go up, but I just don't believe it's going to go up as much as it did in 2020. My 2020 bottom call was spot on. I wrote the call on March 18th, 2020. I said about 23, 2400 on the S&P 500 is going to be the bottom, and that's what happened.

And so we bought, hopefully you bought, and you held on and you didn't panic too much. Now it's obviously easy to panic when things are going down 30% in one month, but hopefully that helped give you some kind of confidence. On the negative side, I certainly did not expect the rebound to be as quick or as much.

So as a result, I did not buy enough on the way up. For 2021, I expect the S&P 500 to increase by about 8%. So that's half the rate of return of 2020 with a year end target price of 4,088, lucky 88. If the S&P 500 generates an EPS of $165 a share, that puts valuations at about 25X.

And 25X is at the historical high over the past about 20 years. So valuations are clearly expensive. However, it's about the valuation and about the expected earnings rebound in 2021. So 2020, the earnings EPS is going to be about $131 per share. We don't know what fourth quarter is yet, but that's the estimate.

So if you estimate 165 plus earnings per share in 2021, we're talking about 25% plus earnings growth. Now, depending on where your estimate is for 2021, it could be as much as a 35% to 40% earnings rebound. So on a relative basis, 25X with at least 25% earnings growth puts it at a one times price to earnings growth ratio, which is somewhat reasonable if the earnings happens.

It's really interesting and worth noting that about 90% of the S&P 500's market capitalization is now based on intangible assets such as research and development, IP and software. Therefore you can make an argument that valuation should go up over time because these type of businesses have higher operating profit margins and are scalable and are more defensible.

We all have seen the dichotomy between businesses that were forced to shut down in 2020 and businesses that were able to keep on operating in 2020. I'm looking at, for example, blog valuations. I talked to numerous suitors in 2020. It was really interesting. And valuations alone for blogs are up 20% to 50% in 2020.

Again, because good cash flow, high operating profit margins, and they cannot be shut down. So let's put my target price of $4,088 for the S&P 500 in 2021 in perspective. Let's look at a couple of Wall Street firms that I know do a pretty good job over time, Goldman Sachs and JP Morgan.

Goldman Sachs has a year end target price of $4,300 and JP Morgan has a year end target price of $4,400. Specifically JP Morgan's 2021 EPS estimate is for $178 per share. That's a 36% earnings rebound. That is aggressive. I think these guys are forecasting way too high because of three things.

One, there's a risk of virus mutations that lower the current efficacy rates of existing vaccines. Let's all pray that there's not a new coronavirus that makes our current vaccines impotent. Two, the other big risk is that there's a slower than expected vaccine rollout. And we're seeing that right now.

And this will have big consequences on the economic recovery. It's probably going to delay the economic recovery from the end of 2021 to 2022 or later. At the current rate of the vaccine rollout, it's going to take five to 10 years until we reach herd immunity. And a lot of us, including myself, are hoping we reach herd immunity by the end of 2021.

And the final risk, and it's out there but not certain, is that the Senate goes blue. So there's two Senate seats in Georgia. We've seen that one of the Senate seats has turned blue. Maybe the other one will, which will create a 50/50 split in the upper house, and which means that Kamala Harris, if she becomes vice president, will be the deciding vote.

So on the negative side for investors, there could be higher regulation, more regulation. Maybe I think we should certainly expect to see higher taxes, not only personal income taxes, but corporate taxes. Joe Biden said on his campaign trail that that's what he's going to do. So if he has power in the Senate or alignment in the Senate, then that's what's going to happen.

We're going to see more regulation and more taxes. On the positive side for investors, we could see more stimulus, right? We could see $2,000 stimulus checks to families who make under $150,000 or individuals who make under $75,000. And we see another round of stimulus checks if needed in the summer of 2021.

It could be just a hip parade of stimulus checks that someone's going to have to pay for, but not us in the short term, right? So whatever happens with the Senate, I think what you're going to see is investors maybe not caring so much. They just want the results to be done, just like the presidential election.

Regardless of who won the presidential election in November 2020, the market just had a relief rally because they found out, "Okay, looks like Joe Biden won, so let's just get on with it." It's one of those, "Let's just get on with things" kind of moment, because we know that politics doesn't really affect the S&P 500 returns.

We've looked at history. I've written a post about it. The returns are kind of what they are regardless of who is in power. But we do know that when there is gridlock, the returns tend to be better. So just something to think about. These are the three risk factors to very bullish S&P 500 2021 estimates by Wall Street.

For me, less bullish, much more pragmatic, but that's just the way I am, especially after a surprising good, good year. In terms of sectors that will outperform, I think consumer discretionary financials and energy will perform pretty well. These are the sectors that lag the most because they also got hit the most.

Financials, it's their time to shine. The yield curve should steepen because rates are going up and it makes lending more profitable. And I don't think tech investors should expect a similar type of outperformance as the economy rebounds. I am overweight tech, and I'm probably going to underperform. I think there's a 65% chance of big tech underperforming as the economy opens up.

The Nasdaq is trading at about 40 XPE. That's the highest since 2014. So it's expensive. Now, obviously, it could continue going higher if earnings grow faster than expected. But I just think there's going to be a sector rotation. And unfortunately for me and other tech investors who've ridden the wave in 2020, there's just going to be a rotation into the underperforming sectors.

I will be investing in the stock market whenever there's a 1% to 2% dip. We saw the dip the first day of trading in 2021. I put some money to work, but I'm not aggressively investing. I will be maxing out the 401k, SEP IRA, Roth IRA for my kids, 529 plans, all that stuff.

But in terms of big money, it's really hard for me to put big money to work. Big is just relative, just my bigger money. And for you guys, it's up to you guys to decide. But again, I only think there's going to be about an 8%, maybe 10% return in the S&P 500 in 2021.

Therefore, I can see opportunity elsewhere. And that opportunity is in the real estate market for me in 2021. The median home price in America went up about 8% to 8.5% in 2020. So if you put down 20%, that's a 40% gross return on a 20% down payment. This level of growth is simply unsustainable.

So I think for 2021, the national median growth rate will hover more around 5%. 5% is the level of growth we've seen more aligned to 2015 and 2017 levels. Meanwhile, commercial real estate, I think is really, really interesting. I think commercial real estate will start catching up as the economy opens up.

There should be deals to be had in the hospitality and office space. If you are a vulture, you should be looking at these spaces for people who own these properties that just cannot hold on until the economy opens. It's sad, but that is capitalism. People who are over leveraged with hospitality and office space, those are probably the opportunities you should really look at.

Mortgage rates won't increase by more than 25 basis points on average, if my prediction on the 10-year bond yield is correct. So in other words, instead of getting a 2.75% average 30-year fixed rate mortgage, maybe it goes to 3%. 3% is still way low. I don't think it's going to go much over 3.25% because I don't think the 10-year bond yield is going to go over 1.5%.

So mortgage rates are going to continue to stay low, which is going to continue to be a nice tailwind for the real estate sector. I think what's also going to happen is that people who've had huge stock gains will shift some of that money into real estate. And I think there's going to be an increase in appetite for cash-flowing rental properties given the value of income has gone way up because interest rates have gone way down.

And this is a constant theme going forward for me. It takes a lot more capital to generate the same amount of risk-adjusted income. But you're seeing rental properties, they haven't grown nearly as much as the increase in the value of their cash flow. Once you've made huge principal gains, especially gains that you didn't expect, I think most of us did not expect these type of stock gains, equity gains in 2020, you want to convert some of these gains into a steady income stream or into real assets.

If you follow the strategy, I think you're going to build a lot of wealth going forward and you're going to be able to protect a lot of that wealth going forward. So again, the opportunity in real estate lies in buying hospitality, office, and also multifamily properties, rental properties. You really want to gain that cash flow because imagine earning a rental increase and a principal gain increase.

That's a double win, folks. And I think that's what's going to happen as the market gets better, stronger, and everything rebounds. Further, strategically, I like buying real estate where there is the biggest difference in company share price performance and local real estate price performance. For example, the NASDAQ closed up 42% in 2020.

Therefore, you want to buy real estate in places like the San Francisco Bay Area and Seattle where many of the NASDAQ companies are located. The returns on Apple, Microsoft, Amazon, Alphabet, Facebook, which account for about 25% of the S&P 500 now, were so massive and they employ hundreds of thousands of people.

It's only logical. You just talk to the people who live in these areas. They're like, "Yeah, we're looking at buying a bigger house. We're looking at upgrading. We're going to get a second house, yada, yada, yada." It's there, folks. I am here in San Francisco. I talked to my softball friends, my friends from tennis.

People are putting their money to work and they're thinking to themselves, "I just had a surprise huge windfall. I want to spend my money on a better life." And that's why we're expecting 25% plus earnings rebounds in 2021 and beyond, because people have pent up savings and huge windfalls to spend.

I also believe big city real estate will make a nice comeback in the second half of 2021 and 2022. Therefore, you want to strategically buy before the comeback is really evident. One of the great things about being in San Francisco since 2001 is that I've seen the herd come back by 2003 after the first 2000.com crash and by 2012 after the 2008 and 2009 financial crisis.

The herd always waits for the green light, always, at least in these previous cycles. It's just the way it is. We want to see safety. We want to see things go up 50%, 100% first before we start putting our money to work. But the savvy investor, the one who's willing to take a little bit more risk or at least strategically leg in before there's a green light, tends to make the most amount of money over time.

At the same time, I continue to believe in investing in the heartland of America. Not only is there a fanning out within cities to save on living costs, I saved 40% on my living costs by just moving three miles west in 2014 in San Francisco. There's also a fanning out across the country thanks to technology and the permanent acceptance of working from home.

This is a multi-decade trend. That's not going to stop. So you want to look at obviously the 18-hour cities. Austin is getting all the publicity, but then there's Miami, right, getting a lot of the VC publicity. It's kind of nuts, but this is just the herd looking at where else things are going.

Remember, we've been talking about that since 2014 and 2017 here on Financial Samurai, and it's really kind of taking off now. So if you're a listener and you're a reader, it's about practicing, predicting the future, forecasting the future. You're obviously not going to get it right all the time, but just think about where things are going forward.

And I think heartland of America real estate is obviously going to be a beneficiary of demographic trends going forward. All right, so we've talked about stocks, bonds, the 10-year bond yield, and real estate. So what we haven't talked about, which is going to be really important, at least starting in the second half or the middle of 2021, is inflation.

The discussion about inflation is really going to pick up steam, especially if the Fed stays accommodative and stocks and real estate continue to go up. Let's say stocks and real estate are up another 5 plus percent by June 2021. Undoubtedly, we're going to talk about inflation. And when we talk about inflation, we talk about an eroding purchasing power of the dollar.

We talk about the K-shaped recovery some more where people are getting left behind. We'll talk about the job market, how it's heating up. And ultimately, we'll talk about why the Federal Reserve will probably have to raise interest rates. Again, this is if everything is going fine and dandy, everything is going up, and so forth.

So inflation is something that is too powerful of a force to combat. You always want to at least get neutral inflation. You get neutral inflation by investing in stocks and in real estate. So in terms of real estate, you want to at least own your primary residence. This way, you can at least ride the inflation wave up and down, up and down.

You're enjoying, you're appreciating asset, hopefully. It's a wonderful combination, which is why I like real estate the most, or at least I prefer real estate over stocks. But in an inflationary environment, what you really need to do is go long real estate by owning more than one property. This way, you can benefit from capital appreciation and rental appreciation.

And you can benefit by collecting those rents or selling off your real estate that has appreciation. Because you've got to live somewhere. You just can't sell your primary residence. And then if you go and rent, then you become a price taker, not a price dictator. So there you have it, folks.

I think with a 75% probability, 2021 should be a profitable year for stocks and real estate. And if something bad happens, you know something bad is going to happen. You know we're going to have 5%, 10% corrections here and there, because valuations are expensive. Everybody seems to be really, really optimistic about the future.

So if something bad happens, you know we can count on Janet Yellen, the Federal Reserve Chair, and Joe Biden to bail us out. There's no way they can't bail us out, since they just got into power. And once you get power, you start getting addicted to power. And you want to hold on to that power as much as possible.

So I believe the government is going to look out for us. And they should. I also think there is a massive amount of savings that is ready to be unleashed. Take a look at your own balance sheet. Do you have a lot of savings now, more than last year?

Hopefully the answer is yes. Ask your friends and colleagues whether they've got large cash buffers. Chances are high, and they probably do, because the national savings rate has been elevated since March 2020. You saw the savings rate go up to like 33% in April 2020. I mean, it's been coming down, but it's still much higher than the national average before the pandemic of about 6%.

So this unleashing of savings is really going to be instrumental for the 25% plus S&P 500 corporate earnings rebound, and for real estate going forward. I know personally, I have a goal of spending at least one month in Oahu at the end of 2021 to spend more time with my parents.

I'm going to spend whatever it is to try to catch up on a life missed in 2020. And I think everybody has the same idea. So let's just remain positive, stay focused. 75% chance that things will go well in 2021. But that also means there's a 25% chance that stocks and real estate have a bad year and things go poorly.

Therefore, don't over leverage yourself, please. Don't go crazy like we've seen in previous bubbles or really bullish times like 1999. Please don't go on too much margin and overextend yourself. Thanks so much, everyone. If you enjoyed this podcast, I'd love a positive review, maybe some commentary to keep me motivated.

I realized that I haven't done one in over a month. And it's because there's just other things to do. And your feedback, your positive feedback will keep me motivated. And I'm gonna try to get my wife on and we're gonna talk about the future, hopefully in a new episode going forward.

Thanks so much and stay safe. And let's hope for a profitable 2021.