Happy New Year…and good riddance to 2020! As you know, 2020 was an extraordinary year in many ways, including in the financial markets. The initial shock of the COVID-19 pandemic triggered a massive selloff of stocks in March; at the low point the S&P 500 was 34% off its highs. We then witnessed an unprecedented fiscal and monetary policy response which injected trillions of dollars into the U.S. economy. Despite the pandemic as well as tremendous social and political unrest, the stock market rallied off its lows and ended the year in positive territory. For the full year, the Dow was up over 7% and the S&P 500 was up over 16%. We are proud that our long term, disciplined approach to investing paid off during 2020. We never panicked and attempted to steer our clients towards maintaining their diversified portfolios and strategic asset allocations.
Where are we now? As we write this, the U.S. stock market is at or close to its all-time high. Interest rates are near their all-time low. The COVID-19 vaccine is being distributed, albeit with issues, and the hope is that most Americans are immunized by this summer. The Democrats have won both the Presidency and the Congress. Here are a few thoughts as to what this might mean for markets in 2021:
- If the vaccine rolls out as planned, we see a gradual return to normalcy throughout the year. This bodes well for the broader economy and for the stock market, especially those sectors which were hammered by the pandemic in 2020.
- We anticipate that fiscal and monetary policy support under a Biden administration will continue to be massive, propping up both the economy and financial markets.
- We expect interest rates to remain historically low but anticipate upward pressure on both rates and inflation.
- We expect stock market performance to be much less concentrated than it was in 2020. Big tech and “stay at home” stocks drove returns last year. A broader economic recovery could be the catalyst for a rotation into sectors that underperformed last year (financials, energy, industrials, etc.). Foreign markets, which have underperformed vs. the U.S., will also benefit from the global recovery.
With the market at or close to its all-time high, we would not be surprised to see a healthy correction in the near future. However, as usual, we would see that as a buying opportunity due to the tailwinds mentioned above. We are reviewing our portfolios closely to position our clients for what should be a broader economic recovery in the second half of 2021.
Please let us know if you have any questions or if there is anything we can do for you.
Matt and Andrew