Reflections on the 2020 stock market

Considering the correction and record highs this year, what can investors factor into their view for 2021?

 
Anthony Saglimbene, Ameriprise Global Market Strategist – Ameriprise Investment Research Group
As of Dec. 14, 2020

Key Points

  • Stock prices continue to reflect a brighter economic environment ahead.
  • However, near-term conditions could slow because of worsening COVID-19 infection trends.
  • Investors can consider three big-picture themes for 2021.

By the end of the first quarter 2020, the coronavirus had spread worldwide, nearly halted economic activity and created a degree of uncertainty not seen since the Great Depression. The Dow Jones Industrials Average logged its worst quarter ever, while the S&P 500® Index posted its worst showing since fourth quarter 2008.

To address the situation, fiscal and monetary responses around the globe — as in the United States — were swift and robust. This provided economies with liquidity when they needed it most, during the depths of the pandemic in March and April.

During this time and onward, economic conditions and corporate profit growth have steadily improved — though both remain well off normal levels. Yet, since the March 23 bottom, stock prices have surged higher, led by the Information Technology sector and stocks that benefit from the stay-at-home theme. More recently following the presidential election, U.S. stocks posted their best November performance in over 90 years.

While a historic year for markets and the economy is nearly complete, we believe there should be additional fiscal stimulus relief for service workers, small businesses, and state and local municipalities. The additional relief is needed for the economic recovery to continue next year as COVID-19 vaccines become broadly available.   

As you review your portfolio with your advisor in 2021, we believe three big-picture themes are important to consider. Combined, these could help support stock prices next year.

  1. The global economy should continue to recover. Tight inventory levels, pent-up demand and further policy accommodation may combine to generate a strong global economic rebound as virus conditions improve.
  2. Global growth could return unevenly across regions. For example, growth in Asia could benefit from better virus containment, while the U.S. appears well-positioned to benefit from a second-half release of spending across consumers and businesses. A widely available vaccine could also aid other regions across the globe over time.
  3. The incoming Biden administration has communicated a focus on stemming the pandemic and several other potential policy priorities. President-elect Biden has said that containing the spread of COVID-19 and addressing the pandemic's impacts will be among his first priorities. We believe the domestic economy and fortification of global relationships also will play critical roles in shaping policy.

While we believe the financial landscape will remain fluid but generally positive next year, stock prices over the next few months may see more back-and-forth movement. Vaccine progress is a large tailwind for asset prices, but logistical issues for distribution may impact sentiment over the near term.

Growing state and local restrictions amid a worsening pandemic are also starting to weigh on activities such as air travel and dining reservations. Notably, while the low interest rate environment has fueled a stock rally over recent weeks, stretched valuations and an increasingly bullish sentiment are becoming a near-term concern, in our view.

The economic recovery is likely to slow this winter, in our view, as the global pandemic could weigh on consumer activity. If vaccine developments, approvals and distribution remain on track with the market’s expectations, stock volatility could be mitigated.

Investors should look beyond worsening coronavirus conditions over the next few months and stay cautiously optimistic about a potential return to a more normal economic and business environment. With broadly available vaccines, cyclical sectors such as Industrials, Materials, Financials and U.S. small-caps could see further recovery in their business trends. Stock prices in these areas could continue to rise ahead of a broader recovery.

For those reasons, we believe investors should recognize the potential for near-term stock volatility and keep their diversified portfolios focused on the prospect of a better tomorrow.

Data source for indices and sector graphs: Morningstar Direct, as of December 4, 2020.

Past performance is not a guarantee of future results.

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