By Caroline Gerber
2020 has been a year to remember. It’s probably safe to say the highs were higher, the lows much lower. In February equities markets edged toward new records, only to collapse in mid-March as the coronavirus outbreak that was first detected in Asia at the beginning of the year became a global pandemic.
As COVID-19 circled the globe, the fallout has been widespread—regional economies decimated and the human toll tragic: 82 million cases and over 1.77 million fatalities at time of writing. Businesses were shuttered and travel halted.
But the dramatic bear market in March, when the S&P 500 dropped 30% in just a few days—the fastest decline on record—then flipped into an uptrend that boosted markets to new highs by August. Of course, governments around the world had a big hand in the advances, which were aided by economic stimulus measures and lower-for-longer interest rates to soften the blow.
As the year wound down, two coronavirus vaccines were brought to market in record time, providing a ray of hope. In November the US elected its first female Vice President, Kamala Harris, as well as her presidential running mate, Joe Biden, sending Donald Trump packing despite his ongoing protestations.
Other events of note in 2020: Oil tanked and then recovered; Bitcoin finally returned to the forefront and is currently hitting a string of new records, shooting over $28K on Dec. 27. The UK-EU divorce drama finally reached an accord both sides can live with and a Brexit deal was signed right before Christmas.
After such a record-defying year what can markets expect for 2021?
We asked some of our most popular contributors to weigh in. Below are four perspectives on where markets are heading, covering equities, Bitcoin and the greenback.
Tomorrow, Wednesday, we’ll publish part II of our Outlook 2021 post, here. We'll dig deeper into where commodities and bonds are headed and present additional views on the dollar and Bitcoin.
Lance Roberts: With Markets Already 'Priced for Perfection' Investors Could Be Vulnerable
As we head into 2021, investors, both retail and institutional, are overly exuberant about an explosion of growth as the economy reopens.
While we are optimistic that a vaccine will undoubtedly allow some sectors to begin to recover, the previous rounds of stimulus, and extended unemployment benefits, have already pulled forward much of the expected “pent up” demand.
With corporate revenue growth weak, and valuations already extremely rich, the market is currently “priced for perfection.” That leaves investors vulnerable to a host of potential disappointments from weaker than expected economic growth to a virus mutation that renders the vaccine ineffective.
Fundamentals will be hard-pressed to rise sharply enough to justify current valuations. If they do, it would have to be on the back of some of the most robust economic growth we have seen in the last two decades, which will come with sharply higher interest rates and an inflationary surge.
In turn, the Federal Reserve would have to hike interest rates, contract monetary policy, and the economy, which is $75 trillion in debt, will grind to a halt.
Such is the conundrum that faces the markets ahead. While the Fed continues to hope that repeated monetary interventions will create more robust economic growth, in reality, it is the pin that pricks the “debt bubble.”
Our expectation for 2021 is likely much more of the same—slower rates of economic growth, low-interest rates, and a market that remains dependent on the Federal Reserve’s accommodative monetary policies.
Jani Ziedins: 2021 Stock Performance Will Be Different, But How?
2020 was a year no one will forget. Not only were we hit by a once-in-a-century pandemic, but the S&P 500 actually rallied 15% year-to-date despite the economic carnage.
As bizarre as it sounds, 2020 turned out to be a good year for stocks. But if there is one thing we know about the stock market, next year will be different.
A good starting point for forecasting next year is eliminating what happened this year from the list of possibilities. Since 2020 was a "good year" for stocks, we cross that off the list. That leaves us with "great year,” "not so good year," "bad year," and "really bad year."
I’m torn between “great year” and “not so good year.”
COVID will stop being a concern this spring and consumers will most likely go on a spending spree after having been cooped up for the last 12 months. But on the other hand, a stubborn 6.7% unemployment rate will drag on the economy and could easily knock us into a very conventional recession.
Why should we be forced to choose one when we can have both?
My 2021 forecast is a strong start to the year as we conquer COVID, followed by a second-half realization a lot of people are still unemployed and that’s not good for the economy. After producing very respectable midyear gains, stocks will stumble in the back half of the year and finish either flat or slightly negative.
Michael Lebowitz: Fundamentals Will Catch Up With Equity Prices
2021 is likely to be the year where fundamentals and economic reality catch up with equity prices. Despite a historic decline in economic activity, equity markets, with the help of massive fiscal and monetary stimulus, closed decently higher on the year. As a result, valuations are approaching and surpassing the prior peaks of the late 1990s and 1929.
We expect weak economic growth requiring steady doses of fiscal stimulus in the year ahead. While fiscal stimulus may keep the market afloat, earnings will struggle to get back to the pre-COVID highs. Given where valuations stand, it will be increasingly harder for markets to continue upward. The risk for 2021 is that investors question valuations. If they do, a repricing of valuations to historical averages portends a 30-60% decline.
Bond yields, including for the 10-year US benchmark, have drifted higher but remain at historically very low levels. The potential for a stronger dollar led by economic weakness would not only upset the equity markets but likely cause yields to fall sharply.
There is little global competition for Treasury bonds as yields in most other developed nations are negative.
Lastly, we believe gold has upside as the Fed has no option but to keep real yields negative. The negative correlation between gold and real yields has been running at nearly 100%.
Dr. Arnout ter Schure: SPX Correction And A Greenback Surprise
I focus my forecast on three asset classes: The US stock market with the S&P 500 (SPX) in particular, Bitcoin and the US dollar.
The stock market is currently experiencing what I label as the “Bidden rally.” This rally should end in the spring of 2021 at ideally SPX4200-4000, and then experience a sizeable correction. I think in the 15-20% range during summertime.
From there, the market should be able to build up another rally going into 2022. It is uncertain if this rally can best the spring 2021 all-time highs. This forecast is based on my big-picture Elliott Wave Principle count (see here), the 10-year relationship between oil prices and the Dow Jones(see here), and Gann (see here), among others. Thus, if you time your entries and exits reasonably well, 2021 can provide excellent opportunities on the long- and short side of the trade.
Bitcoin, which has already gained over 400% just this year, should continue to do well. After such high gains this year alone, a sell recommendation would seem more likely, but triple-digit-gains are the norm and not the exception for cryptocurrencies. Based on my Elliott Wave Principle count and other analyses, if this instrument can stay above $14K on a monthly closing basis it can reach the mid-to-high 20-thousands (black arrows) before a more sizeable correction, think 2019, will happen.
Lastly, the surprise could be the all-mighty greenback. It seems it is not on many traders’ and investors’ radar as, therefore, it is an excellent long trade. Still, if it can hold the $88 zone early next year (January-March) on a monthly closing basis, to complete (green) wave-5, it should be able to rally back to $98-100 throughout 2021, potentially much higher into the following years (blue arrows). But that is a story for another time. If $88 does not hold, I do not expect a bottom until $78 is reached.
Editor's Note: Read Part II here.