On March 23, 2020, the COVID-19 crisis-driven market crash hit rock bottom. The S&P 500 had shed 30% of its valuation in 22 days.
Bear-market sell-offs of this size have occurred five times since WW2. History shows a typical response is a strong year one bull market, with good — albeit slower — returns in year 2.
However, this bull market is different from previous years for several reasons. Firstly, the previous market crashes occured due to dysfunction in the financial sector, while a pandemic caused 2020’s crash.
Secondly, 2020’s rally was not organic and was propped up by massive government stimulus packages. The big question for investors is, can the market continue its recovery without government assistance?
The Industry Perspective for S&P 500
There is the usual diversity of opinion within the industry, but some consensus about tempering expectations for 2021. Commonfund, a nonprofit investment manager, has recently released the results of a survey of 300 investment managers.
Analysts at IG.com suggest that a successful vaccine rollout will benefit cyclical stocks. Like financials, industrials, energy, commodities, and the currency market. However they do worry about the effect that a tech stock slowdown will have on the index.
Morgan Stanley’s Andrew Slimmon shared similar reservations about market performance this year in a recent blog post.
Slimmon noted that second-year bull market returns are traditionally good but that investors should brace themselves for some level of instability throughout the year.
Russell Investments outlook for 2021 includes a belief that inflation pressures won’t materialise until 2023.
Despite the U.S. marketing being overbought, they suggest that equities are still a better option than bonds this year.
Furthermore, they believe the U.S. stimulus means it will secure its place as the fastest-growing market throughout the year. With that growth helping Europe, China, and Japan somewhat.
The Industry Perspective for the FTSE 100
Similar notes of caution have been sounded for the FTSE 100. Compared to the S&P 500, the index has underperformed due to the weight of more traditional companies like airlines and natural resources.
A composition that lacks significant companies has resulted in slower gains. To counter this — and make the U.K. market more attractive to tech firms — a series of reforms like dual-class share structures are being proposed.
However, as Q2 develops, they believe investors will have a clearer picture, with some positivity to be found in a shift away from the uncertainty over recent years.
A Rocky Road Ahead?
Despite all the upbeat predictions issued by many, some analysts believe things will be more complicated throughout the year.
Inflation and rising interest rates should be kept at bay through 2021, and largely centrist governance should keep burdensome regulations or big tax-hikes off the table, which are all positive indicators for the stock market.
While Jarred Dillon at Bloomberg has said that the only prediction that matters for the year is that most predictions will be wrong, he underlined the futility of divining the markets.
Alpesh Patel’s Conclusion
2021 will be an interesting year for stocks. The S&P 500 is weighted towards stocks that benefited from stay-at-home orders.
J.P. Morgan’s growth forecast suggests an S&P 500 price target of 4,400 by year-end, with global growth at 5.8%.
So, overall, the stock market should continue to climb, but at a slower rate than in 2020. Some sectors stand to benefit from the economic recovery more than others, but investors should brace themselves for few surprises during the year.
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Alpesh Patel OBE