As 2020 is about to close down, many investors still wonder if Wall Street will continue to rise in 2021? From an absolute wreck in the first few months of the coronavirus’ appearance, it now proudly holds record highs in major indexes. In contrast, the economy remains sputtering, small businesses are dying, and the jobless rate remains high. So what is happening, and why are the markets riding high?
Despite the bleak scenario, investors have largely chosen to focus on the days ahead. This is why investors greet news of vaccine approvals and hopes for stimulus spending with a stock market rally. Michael Arone, chief investment strategist at State Street Global Advisors said that the optimism fueled the market. He noted “One of the things that the pandemic has underscored more than anything else is that the stock market is a forward-looking mechanism. That’s been the tagline all year long as investors continue to scratch their heads wondering why the stock market could perform so strongly while the economy, labor market, and earnings face such challenges. It’s more about future expectations than current conditions. It’s something that investors were loosely aware of in the back of our minds always.”
New Breed of Investors
These enthusiastic expectations, coupled with a stay at home orders for most of the populace, attracted a new breed of investors, many of which are new to the game. According to securities firm JMP, the brokerage industry opened 10 million new accounts in 2020 alone. In particular, trading app Robinhood accounted for about 6 million of these new accounts.
Many of these new investors used their stimulus money to bankroll their trades. Despite a lack of market savvy and experience, these day traders made a killing as they scooped up failing companies then watched as they rebounded. Billionaire investor Leon Cooperman explained how they started. He said: “The government is giving you more money to stay at home than go to work, the gambling casinos are closed, the Fed is promising you free money for the next two years, so let them speculate. So let them buy and trade.”
Parallel to the Virus Response
The markets’ ebb and flow for 2020 reflected how America handled the coronavirus pandemic.
First came surprise and fear. Then came hopes for a faster recovery, then caution. Rinse, repeat. Sam Stovall, the chief strategist for CFRA, noted that nobody had an idea at the beginning. “Usually it takes an unanticipated event to cause the market to get knocked on its ear, and nobody prior to the new year, that I can think of, said we’re going to have a problem with a virus in 2020. Everyone creates their yearly forecast in early December, so if the market was still at an all-time high on Feb. 19, obviously a majority of people continued to think it would be a good year and even with the virus in the background it would not be a world-altering event — and oh, how we were wrong.”
Not only did coronavirus disrupt the markets, but it also switched the timeline to a breakneck pace.
“Everything was so fast. We went from peak to trough in 33 calendar days, which was three times as fast as the 1987 bear market. Feb. 19 was the record. It fell 34% in 33 calendar days,” Stovall added. “The Fed said we’re going to do whatever it takes, the market said you don’t fight the Fed and we got to breakeven on Aug. 18, which made it the fastest recovery on record and then we scored 19 new highs since then.”
Coronavirus Dictated the Market
During the pandemic, investors initially favored stocks they think would help people working from home. Remote work tools, delivery apps, and video conferencing software became all the rage. Businesses aimed to provide travel and entertainment went down.
When vaccines became closer to reality, the trend shifted to stocks in the entertainment, travel, and leisure industries. Investors expect pent-up demand for these sectors will go through the roof soon as a majority of Americans receive vaccines. At the same time, pandemic performers like Zoom and Peloton started losing their shine.
Possibility of Pullback in 2021
With stocks registering record highs, the market aims to end the year on a high note. However, expecting a pullback early next year is reasonable. Stovall notes that “valuations right now are trading at a 42% premium.” Compared to the economic crisis in 2008, stocks also moved higher ahead of economic recovery. However, valuations grew only up to the teens, and not into the realm of 30% and above.
Chris Rupkey, a chief financial economist at MUFG Union Bank, says a bubble might be in play. “The only difference in this stock market is the stock indexes have gotten to levels that are at values we almost haven’t seen before. … We haven’t seen valuations since before the internet stock market bubble in the late 1990s,” he said. “It’s OK for stocks to be here if companies are going to make a lot of money next year.”
Watch the Yahoo Finance report where National Securities Corporation Chief Market Strategist Art Hogan discusses risks to the stock market rally and the outlook for 2021:
Happy New Year! Will Wall Street continue to rise in 2021? Do you think stocks will now retreat in 2021 after a great rally in 2020? Or do you believe the bullish trend will continue? Let us know what you think by sharing your comments below.