Here’s How the Stock Market Rally Can Continue in 2021

Written by Martin Shields

Without exception, 2020 will be one for the record books! When we started the year, if anyone knew the economic collapse that would occur, I don’t think many would have predicted a market rally anywhere near what we have experienced.  As of the markets’ close on Thursday, December 31st the S&P 500 Index was up almost 18% for the year.

The million-dollar question becomes whether this market rally can continue through 2021.  Let’s review the factors that will determine the answer to this question.

Vaccine, Vaccine, Vaccine

It can’t be understated how important the successful distribution of the COVID vaccine is to the market rally continuing and the economy improving.  At this point everything looks like we should be in good shape to get everyone vaccinated by the 3rd quarter of 2021.

There Is No Alternative (TINA)

This acronym simply means there are no investments in this ultra-low interest rate environment that provide any decent return when compared to stock.  Here is an example of how TINA plays out for investors: they can invest in the 10-year US Treasury bond and lock up their money for 10 years to receive an interest income rate of 0.75% annually or they can buy the S&P 500 Index and receive dividends yielding almost 1.75% with the possibility of capital appreciation over 10 years.

Don’t Fight the Fed

 When the COVID crisis was at its worst last spring the Federal Reserve Chairman Jerome Powell made the statement that they would buy an infinite amount of bonds.  This statement and their broad bond purchasing activities provided significant liquidity to the markets making business and individuals much more inclined to take on risk through loans and investing.  Their dramatic positioning is a result of what they learned during the 2008 financial crisis and if they hold this view it actually changes the risk paradigm of being an investor in the stock market.

Strong Housing Market

With mortgage rates at historic lows the housing market has reacted in a very positive manner with sales and prices rising year over year. If rates remain low, the housing market will remain strong and because of all the ancillary purchases that occur during a house transaction this will be a strong tailwind for the economy and markets for 2021.

 Pent up Demand and High Savings Rate

Although many households are struggling financially through this crisis, there are also many households that are in a strong financial position because they have not been spending money on trips or going out to eat.   This pent-up demand and the higher savings rate across the country, will show up as increased consumer spending once the vaccine has been widely distributed.

With these factors in place, it is likely the market rally will continue in 2021. That being said, when the  price-to-earnings (PE) ratio of the stock market gets elevated as it is currently, there can be periods of  short-term market volatility so this should be expected.

 

If you have any questions on whether your portfolio is positioned properly, please feel free to contact our firm to have your portfolio reviewed.