What To Expect From Stock Markets This Year

Stock Market This year

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.

On S&P 500 returns for 2021. Around 60% of institutional investors surveyed felt that returns would be lower than the average ten-year returns of 13.6%. 

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.

On top of this, they cite accommodative monetary policies from central banks as a driving factor in money flows. Being directed towards higher-risk markets and assets like Asia and the debt markets.

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. 

He believes some value stocks like banks, movie theatres, and cruise lines could represent an opportunity based on current prices.

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.

IG.com has highlighted a few sticky areas for the U.K. throughout the year, including Brexit and the potential ill effects of new coronavirus strains. 

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. 

Investors.com has suggested that the market has already priced in an economic rebound and a flawless vaccine rollout, and any roadblocks will “rattle investors.” 

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.

However, Acorns.com noted the forward price-to-earnings ratio of some of the S&P 500 means stocks have only been this overvalued around 5% of the time since 1985. 

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. 

Suggesting that any forecast of more than one or two months is vulnerable to unforeseen events. 

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.

While a broader economic recovery is predicted, it could — as suggested by The Motley Fool — end up hurting the index.

Conversely, Nasdaq suggests that the big tech stocks are still cheap because they’ve underperformed the market since July.

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