2020 has given us a formidable reminder of what volatility feels like. If you’ve been able to persevere as an investor, you are now enjoying the U.S. stock market’s all-time high. However, what matters now is what lies ahead. While the future is unpredictable, here are seven reasons stocks could have a strong year in 2021:
A roaring 2020s economy. For many long months, Americans have been cooped up and unable to engage in the activities they enjoy. But as multiple Covid-19 vaccines get approved and are widely distributed, look for an upward burst in the economy. Soon, we may experience a ‘Roaring 2020s’, with travel and leisure leading the way. This will benefit not only hotels, airlines, restaurants and gaming but also retail, energy and commercial real estate. In addition, industrials and the aerospace sector should benefit. The net result will be lower unemployment, an increase in consumer spending and resumed business investment.
Continued low interest rates. The Federal Reserve Bank has indicated it will continue its low interest-rate policy for the foreseeable future. Low rates make bonds and bank deposits less attractive; and these low rates often drive investors to higher risk investments, such as stocks. This phenomenon is known as ‘TINA’, an acronym for ‘there is no alternative’.
A return to globalism. A Biden administration, if prior policies are any indication, will prefer a calmer, more globalist approach than the Trump administration. Having a more predictable business environment, not rattled by frequent tweets and tariff threats, is something many investors will welcome. Similarly, reduced trade tension should help overseas economies—most notably the Asian emerging economies.
Increased immigration. Economic growth largely comes from growth in two areas: 1) increases in productivity, and 2) population growth. Fortunately, U.S. domestic productivity has been steadily increasing, bolstered by reduced regulation from the Trump administration, new and increasing use of technology, and American ingenuity. However, as we see in developed Europe and even in Japan, stagnant population growth is a formidable opponent to even the most robust economy. Many developed nations, including the U.S., suffer from aging populations and lower birth rates. A more lenient immigration policy from the Biden administration should have a positive economic impact for the U.S. (although the resulting increased supply in labor may slow some of the impressive wage gains we saw pre-Covid).
Merger and acquisition activity. Look for consolidation in hard-hit industries as they strive to better compete in a post-Covid landscape. For example, look for banks to engage in a wave of merger activity. Banks will be operating in a low-interest rate environment which will hurt earnings. They also have a legacy brick and mortar structure that is proving to be expensive and less in demand. Merging with competitors helps reduce expenses and more easily allows for branch closures.
Trillions of cash on the sidelines. Investors have been holding on to their cash. Even prior to Covid, the historic bull market was one of the most unloved in recent history. Cash on the sidelines was estimated to be in the trillions, and once Covid hit, the cash hoarding only grew. Should the economy continue to recover in 2021, and especially if interest rates remain low, look for some of that cash to find its way into the stock market.
Earnings growth and favorable earnings comparisons. Over the long term, corporate earnings are the biggest driver of stock prices. If there is a continued economic recovery in 2021, many sectors should experience favorable earnings growth relative to 2020. Positive changes to earnings are usually good for stock prices. Stronger corporate earnings could give skittish investors the confidence they need to invest in stocks.
We are all aware that investing carries known risks, and 2020 has sorely reminded us that unknown risks are also lurking. Investors facing the uncomfortable choice of where to invest should look at the data and avoid letting emotions lead. Investors should consider their own tolerance for risk, the amount of time they plan to have their money invested, their overall financial objectives and other factors. As we approach the end of 2020 there are plenty of reasons to want to hold on to cash, but there are also some compelling reasons to consider risk assets like stocks.
