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At the turn of every year, Analysts flood financial news by projecting what the stock market may do in the coming three hundred and sixty-five days. Often the stories which gain traction are those which predict the largest swings in either direction, with attention-grabbing headlines such as “Dow set to Plummet 66%” and the unspoken byline “abandon all hope, ye who dare invest”. With stocks entering 2021 facing more headwinds than investors have faced in years, will the stock market crash in 2021?
Why the Market Will Crash:
Table of Contents
The Coronavirus Resulted in a Hit to the Economy Which Will Not Simply Be Shrugged Off
When history looks back at 2020, one of the defining features will be the millions of friends and family who had their livelihoods turned upside down. We lost millions of jobs. While the unemployment rate is well off of its highs, and 2021 should bring multifaceted relief, life for many will not be quick to snap back to normal. The way we work has transformed. Many jobs will not come back as a myriad of old business plans do not translate to the new normal.
The economy will evolve, and we will create new jobs. The necessity to work and do business remotely has pushed technical adaptation forward several years. These periods of technological advancement drive the market forward but require a period of adjustment. We will recover, but for all of us, the world has changed.
COVID-19 Vaccinations-A Mass Vaccination That Most Have Not Experienced in Their Lifetime
COVID-19 was ever-present since its identification in 2020 and will continue to cloud over much of 2021. Pharmaceutical companies around the world have come together with unprecedented results. Two current vaccine candidates have shown 90% efficacy within late-stage trials and a worldwide rollout is underway. The fact remains that some percentage of the population:
- may not be vaccinated on religious grounds
- will refuse vaccination because of distrust towards the government, political parties, or of the pharmaceutical companies themselves
- will be put off by side effects of the first injection and refuse, or not understand, they need a second
- have a legitimate concern with how their unique body chemistry interacts with the vaccine.
- Will be cautious with both a vaccine and virus for which we have no long terms testing results available
A Feared Upheaval of the Status Quo
During the fourth quarter of 2020, it became apparent that Wall Street was betting on a split congress. Historically, this has resulted in the best returns for investors providing certainty and safeguards against any dramatic shift in policy. Radical ideas will become more moderate as they pass through the House and Senate and must seek a consensus approval among members of both parties.
The ongoing runoffs for two Georgia Senate Seats could upset this expectation. The most likely outcome will result in the republican party holding both seats, maintaining control of the senate, and resulting in a split congress. Should the Democratic party pick up these two seats and control all three of the Presidency, The House of Representatives, and The Senate, the immediate reaction on wall street may be negative for stocks, at least in the short term, with a higher level of volatility as wall street digests any proposed government action.
Update– The runoff election votes are final and the Democratic party have won both Georgia senate seats. Democratic nominee Jon Ossoff overtook incumbent republican senator David Perdue. He now joins Raphael Warnock who Georgia re-elected to his seat.
The market has seen some mild volatility with an initial drop in big tech (which quickly recovered and is back to setting new all-time highs), as well as large gains in cannabis, continued gains in green energy, and mixed volatility in healthcare.
New Investors’ Resolve Is Yet to Be Tested
The shift away from trade commissions and the increasing availability of fractional shares <what are fractional shares> has brought in many new and young investors. The back half of 2020 brought abnormal gains from well know names such as apple <what is a stock split> and Tesla as well as favorite speculative names such as Nio and Virgin Galactic. Many of these investors have only seen their initial enthusiasm spurred on by unsustainable returns, yet to have their resolve tested. How they will react during a downturn, or when their returns slow to a typical rate, remains to be seen.
Why the Stock Market Will Continue to Provide Returns in 2021
Clearing Uncertainty
If there is one thing that Wall Street hates, it is uncertainty. Faced with it, the market will often error on the side of the worst-case scenario, until given reason to believe otherwise (this shift can be sudden and burn many hoping to time it). 2021 should continue to provide clarity around the situation in Washington and relations around the world. It will bring clarity as amazing companies provide vaccinations to a virus which have consumed our lives. It will promote stability as we learn about the public’s reaction to the vaccine, its long-term efficacy, and what a reopened economy, and our daily lives that support it, might look like.
Lack of Appealing Options
With the move towards zero percent interest rates, alternative investment vehicles become less and less appealing. Bond and saving yields are currently uncompelling, resulting in a lack of alternatives for money to flow into. While low mortgage rates should be a boon to real estate investors, this has spurred demand, which combined with near record-low inventories, has resulted in an overly competitive market with deals few and far between.
Stocks have always been the biggest game in town. Right now, it is among the only ones. The move to no commission trades has lowered the barrier of entry. This has brought an influx of new investors into the stock market. These new investors have brought enthusiasm into a market that feeds off of it.
Fed Action Continues to Support the Stock Market
Learning from the past, the Federal Reserve moved swiftly and decisively to support our economy in the face of the devastation wrought by COVID-19. While they have already leveraged many of the weapons they have to deploy, the fact that they continue to express patience and have been transparent in their view of the economy and the ways and limits to which they plan to support it (including refraining from raising interest rates until 2023) has helped us maintain some stability.
Will the Stock Market Crash in 2020? Will the Stock Market Crash Again in The Future?
While the valuation of the stock market is stretched, when viewed in a historical perspective, and there is a higher level of uncertainty around the adaptive timeline of our economy and a population’s waning resolve against a virus that has impacted their lives for over a year, an outright devastating crash in the coming year seems unlikely. Expect actions taken by the new administration deemed good for the market to balance those deemed to be bad. We can see this currently as the uncertainty a unified congress brings was quickly offset by news of expected stimulus action.
The stock market, like every asset class, has had its share of down years, and inevitably it will have a correction again. When it does, it will bring about new millionaires, those who were lucky enough to time it just right, some of whom will claim how easy it was to see. Along the way will be far more who sat on the sidelines for years waiting for the drop, missing the years of gains that led up to it.
Much as gambling is subtly weighted in favor of the house, given a reasonable time horizon, the stock market is weighted in the investor’s favor. There will be bumps along with way, there will be times you are scared and simply wish to take your money out of the market and keep it safe (and plenty who will feed into this fear), but the stock market is the closest many of us will ever get to being the house, and, given enough time, the house always wins.
Questions From the Community
Have a question I didn’t address or anything you would like further information on? Leave it in the comments and I’ll address it here and cite you for the inspiration!
Questions for the Community
- What do you think 2021 will bring in terms of stock market returns?
- Are you accumulating cash waiting for a downturn? Continuing to add money into the market over time?
- Do you feel any alternative investments providing an attractive opportunity at the moment?