Worried about another recession? Here's what the stock market is predicting for 2021
It’s been a year of fear for many Americans: The worst global pandemic in a century has taken more than 300,000 lives, battered the U.S. economy and propelled the stock market into the fastest crash in history.
But markets have since staged a stunning turnaround and reclaimed record highs, defying the doomsayers despite a backdrop of historic job losses, bankruptcies and shrinking corporate profits. The market was driven higher by Big Tech stocks as trillions of dollars in stimulus from the Federal Reserve and Congress propped up an economy gripped by recession.
So while the COVID-19 death toll is staggering, the stock market is telling Americans to be optimistic about 2021, experts say.
Why? The economy is expected to continue recovering with a vaccine on its way. And Wall Street professionals expect another good year for investors.
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That sort of optimism was hard to imagine after trillions of dollars in market value was wiped out in March, when stocks plunged 34% a month after hitting record highs. But the head-spinning crash also left investors with beaten-down stocks at bargain prices.
“The stock market is the only place where things go on sale and people leave screaming,” says Ryan Detrick, chief market strategist at LPL Financial, an independent broker-dealer. “Now that we’re back at records, it’s a harsh reminder to people that the stock market is a forward-looking mechanism and sees better times ahead.”
Jimmy J. Tran, 40, is one of those Americans who jumped at the opportunity to scoop up stocks in the downturn after learning from past mistakes.
Following the aftermath of the Great Recession, he was saddled with student debt from his MBA program. It was a scary time for him, he says, because he was worried about making ends meet after his job offer got pushed back for five months.
After that experience, he was on a mission to become financially independent. Over the past decade, he started chipping away at his student loans and began investing more in real estate to grow his personal wealth.
When the pandemic hit in the spring, he was laid off from his job at a commercial real estate firm. He decided to pursue other passions. Now, Tran is a full-time investor and small business owner at Code Ninjas in Dallas, a coding franchise set to open in early 2021 where children learn STEM skills.
“My advice for anyone working in corporate America is to always have other interests or side hustles that they can pursue if they suddenly don't have a job,” says Tran, who used the market drop earlier this year as an opportunity to max out his IRA contributions for himself and his wife for 2019 and 2020.
“I was preparing, saving, investing for years to accumulate a nest egg,” Tran says. “The key is to keep your personal balance sheet strong so that you’ll be in a position to invest when the market implodes. When prices are low, buy more.”
Unloved bull markets
Not everyone was able to take advantage of the market drop during the economic recovery, which has widened the divide between the haves and have-nots. Some remain fearful about the trajectory of the economy as unemployment remains historically elevated and COVID-19 cases spike heading into the winter, threatening further business closures.
Still, the economic expansion that began in the summer may have years to run, experts say, and that typically fuels further stock gains, helped in part by strong corporate profit growth. The length of expansions has averaged 5.3 years, according to LPL Financial, which anticipates a more gradual recovery ahead after stocks snapped back this year following the sharp sell-off in March.
Early stages of a bull market
The first phase of this bull market, which typically delivers the strongest returns, is likely over, experts say. In the next phase, SunTrust Private Wealth Management expects positive but moderating returns, sustained by the improved economy and a rebound in corporate earnings. The average bull market has gained a cumulative 179% and lasted almost six years, versus the current rise of about 65% over the past nine months, according to the firm.
The recovery’s current phase in some ways mirrors the pessimistic attitude of investors in 2009 and 2010 following the aftermath of the Great Recession, according to Michael Antonelli, market strategist at Baird, a financial services company. In the short run, it’s hard for people to grasp that the market is influenced by whether things are getting better over the next six to 12 months, not by daily negative headlines, he said.
“After you experience a financial trauma like a stock-market crash, a recession or high unemployment, a lot of people get stuck in the mindset that things aren’t as good as the stock market thinks, so they wait for the all-clear before investing,” Antonelli says. “I worry that people are falling back into that mindset now.”
Health and wellness ahead of finances
The pandemic has put increased attention on Americans’ health at the expense of their financial stability, according to a new study. That threatens to prevent households from building their nest eggs in the early stages of a new bull market, a critical period for long-term investors seeking to boost retirement funds.
Only 13% of Americans are including financial planning as a resolution in 2021 – an 11-year low, according to the annual New Year’s Resolutions Study conducted by Allianz Life Insurance Company of North America. Over half of Americans say health and wellness is their top focus, while less than one-quarter say financial stability.
It's a troubling sign because it means that Americans are more likely to put together a financial plan after a market crash, rather than before one, says Aimee Johnson, vice president of Advanced Markets and Solutions, Allianz Life.
“There’s no doubt that there is great value in improving one’s health and wellness, but now more than ever, financial health needs to remain top of mind,” Johnson says. “Poor money management can negatively affect your health because of the stress that can be caused by fretting over impacted financial plans.”
Americans stressed about finances
When asked about the stock market, nearly a quarter (23%) of respondents said they are “terrified the market will crash and we’ll have another recession,” up from only 16% in 2019, according to Allianz Life. Another 25% said they are pessimistic about the markets and believe they will probably lose money in the near future.
Still, wealth managers have advised clients to plow money into the stock market if they have the financial means.
One reason why, they say, is that optimism for the economic rebound in 2021 has grown, with expectations for further stimulus and the rollout of the COVID-19 vaccine. Investors have also gained confidence from a strong housing market, improved consumer spending and better-than-expected corporate profits.
Detrick has advice for those who are worried about investing: don’t panic.
“One of the best ways to create long-term wealth is through stocks, and the best way to do it is to buy when there are pullbacks in the market,” Detrick says. “If you’re holding this money for the next few decades in a retirement fund, the best thing that could happen is to use this as an opportunity to grow your nest egg.”
Vaccine hopes, further stimulus bets
The return to all-time highs comes after stocks suffered steep losses following a downturn in which the S&P 500 tumbled about 34% to a low on March 23, ending an 11-year bull market run – the longest ever.
Since the March lows, stocks have rebounded roughly 65% after the Fed and Congress stepped in and provided an unprecedented amount of financial aid to shore up the economy, which has helped rejuvenate optimism around growth in 2021.
“As another COVID-19 wave subsides next year, that stimulus could help the economy recover even faster,” says Brad McMillan, chief investment officer at Commonwealth Financial Network, an investment adviser. “The economy has kept improving despite the risks in recent months. If those issues fade, we should see an even faster recovery.”
Stocks have also typically thrived under legislative gridlock in Washington. A split Congress has historically been the best scenario for Wall Street, which would bode well for investors if Republicans keep control of the Senate.
“This COVID-19 crisis was a one-off event due to a shock to our health and well-being. It wasn’t a banking crisis,” Antonelli says. “People are underestimating how quickly that we could get back to a strong economy and a healthy labor market next year.”
The S&P 500 has rallied nearly 15% this year, and is currently trading around 3,700 after falling to a low of 2,237.40 on March 23. In a recent client note, Goldman Sachs expects a 17% surge in the S&P 500 to 4,300 by the end of 2021. U.S. GDP growth is expected to hit 5.3% in 2021, Goldman said, above consensus estimates of 3.8%.
The firm anticipates that the unemployment rate will drop to 5.3% at the end of next year, down from 6.7% in November and a record 14.7% in April, the highest level since the Great Depression.
Risks for stocks and economy remain
To be sure, there are challenges ahead that could threaten the stock market’s latest rally, including another coronavirus wave, experts say. Job gains have slowed for five straight months since peaking at 4.8 million in June. The U.S. economy has recovered just 56% of the 22 million jobs lost to the pandemic-induced recession, according to the Labor Department.
Some market professionals worry that a stalling U.S. economic recovery could slow the stock market gains without further fiscal aid. Investors hope for another rescue package from Congress to help sustain the recovery, but talks among Republicans and Democrats hit another stalemate this month as 12 million Americans could lose their unemployment benefits the day after Christmas.
The U.S. economy could slip back into a downturn if Congress doesn't pass new stimulus, some economists say. Such a relapse just months into recovery is known as a double-dip recession.
The progress in developing a vaccine raises the odds of a stronger rebound in economic activity over the second half of next year, according to Bob Schwartz, senior economist at Oxford Economics. But the economy will be navigating a rough patch over the next six months, he added.
“The timing of fiscal support as well as how badly the health crisis deteriorates will determine if a double-dip recession can be avoided,” Schwartz said in a note. “Barring the worst-case health scenario, the economy should survive the current wave of COVID-19 cases if cushioned by more fiscal stimulus.”
Although optimism is high among investors, experts like Detrick and Antonelli worry that stocks could be more vulnerable to a pullback if there is any bad news, including unexpected setbacks in a vaccine.
Sky-high sentiment and pricier stocks could lead to a mild drop in the market around the corner.
Thomas Lee, managing partner and head of research at Fundstrat Global Advisors, who called this year's market rebound before most others, predicts that 2021 will be another strong year for the stock market. But he expects a correction, or a drop of 10% from records, in the first half of the year.
"I'm nervous, but I'm still investing," Tran says. "Stocks are more expensive now than earlier this year, and it's tough to find good buying opportunities. I'm not sure we're out of the woods yet."
A survey by the American Association of Individual Investors, a weekly barometer of retail investor sentiment, found that bullish sentiment, or expectations that stock prices will rise over the next six months, stood at 48.1% for the week that ended Dec. 9, remaining above its historical average of 38% for a fifth straight week.
"When you have elevated sentiment and high expectations, it leaves market more vulnerable to bad news," says Keith Lerner, chief market strategist at SunTrust Private Wealth Management. "There will be bumps along the way."
But there will always be a carousel of concerns for investors even after the pandemic ends, Lerner added.
"You have to remember the purpose and goal for your retirement money," Lerner says. "Not doing anything leaves you more at risk."
Room for improvement
Despite so few people saying they will include financial planning in their resolutions for 2021, not all of the financial planning news is doom and gloom. More Americans (88%) expect their financial situation to improve or stay the same next year rather than get worse (12%), and more than one-third (37%) said they reduced their overall spending since the start of the pandemic, according to Allianz Life Insurance Company of North America.
There is still room for improvement. Only about one-quarter (27%) of Americans said they were more likely to work with a financial professional in 2021, the same amount who were looking for more financial planning help heading into 2020.
“This won’t be the only time Americans experience financial hardship,” Johnson says. “We work our whole lives to save this money to retire. To needlessly set it aside as a non-priority is scary. If you can do something about it, do it.”