Are you with the stocks up and bond yields higher crowd? Being contrarian

Many investment forecasts for 2021 are being published, and there is a clear consensus that stocks will be higher, yields for the 10-year Treasury will be higher, and the dollar will be lower. Let the good times roll for risky financial assets. Yields are going higher whether from inflation or real yields and the dollar will not be a safe haven. 

The average equity benchmark return from the set of Bloomberg reporting market analysts is 9.2% for 2021 as of this week. The low is 2.9% and the high is 19%. The average 10-year bond forecast for the fourth quarter of 2021 is 1.24% or 30+ bps higher than the current level. There is also consensus that the dollar will decline next year; however, the gains in foreign exchange are only slightly higher than the forward rate differentials. Short rate will be viewed as continuing to stay low with no changes in monetary policy.

Everyone is thinking the same, so the real opportunity is to review the case for the alternative and potentially move against the consensus. The stocks up and yields up is based on the simple premise that the vaccine will work and pandemic restrictions will be lifted so that consumption spending constraints will be gone. There will be no ramp-up constraints on business, limited labor problems, and a costless reopening of all small businesses. Liquidity will be still readily available and central banks or governments will effectively manage  inflation, credit, and business issues. 

The glide path is simple to the main thought experiment is thinking through what happens if the everything happens slower or is more difficult. Most analysts will not touch these issues.

For any forecast, walk through the assumptions and ask the simple question, "What has to go right?" Then ask, "What can possibly go wrong?" Finally, review your forecast against these good and bad paths. The odds are still likely that stocks will go higher in a normal world. There is a positive market risk premium. It is also likely bond yields will go higher if growth returns. However, there will be no normal return to normalcy, so betting against the consensus is fair.