Happy New Year! Believe it or not, in just two months we will be a full year into the coronavirus pandemic, and all the chaos and uncertainty it has wrought. By that time, we may have a clearer picture about how things are going to shake out for the economy and financial markets in 2021. In the meantime, it’s important to continue making safety a top priority when it comes to your physical, mental, and financial health. While there are many reasons to be optimistic, there are also many challenges still ahead.
As 2020 ended, it certainly seemed that Wall Street was feeling optimistic about the new year. Stock prices hit all-time highs on the very last day of trading. What’s more, the S&P 500 index finished the year up 16.3% while the tech-heavy Nasdaq grew by nearly 44%. In fact, the stock market has been booming since early November, hitting numerous new record highs despite growing challenges that have carried over into the new year. These include surging Covid-19 cases and deaths, high unemployment, lingering worries about the pace and strength of the economic recovery, and a vaccine rollout that’s moving much slower than expected.1
However, there have also been some positive developments, and big investors have stayed laser-focused on the good news while mostly shrugging off the bad, as they have since the start of the pandemic. One major bit of good news was the approval of a coronavirus vaccine—two in fact! Another was the release (at last) of a second round of economic relief by Congress. The $900 billion stimulus package was a follow-up to the $2.2 trillion CARES Act approved last March. It was signed into law two days after Christmas and is seen by many economists as vital to keeping the recovery moving forward until the pandemic is under control. What’s more, many believe president-elect Joe Biden and his administration will introduce yet another stimulus package sometime soon after his inauguration on January 20th.2
Bumps in the Road
Big investors clearly like the idea of more stimulus, as proved by fact that the Dow and S&P both shot to new record highs again in response to the surprise results of the hotly contested Senate runoff race in Georgia on January 5th.3 Democrats gained two seats in the election, giving them majority power in the Senate and greatly improving the odds that Biden’s plan for more economic relief will be approved. Historically, Wall Street prefers a divided government, and many thought a Democratic sweep in Georgia might trigger a market drop. However, once again we saw investors ignore the potential negatives and focus on the positive. At the same time, the prospect of full Democratic power and more stimulus did trigger some nervousness in the bond market, sending long-term interest rates slightly higher. The yield on the 10-Year Treasury rate topped 1% for the first time since last March.4
What might all of this mean for the weeks and months ahead? Well, the potential for more nervousness throughout all the markets certainly exists, and there are several issues that could trigger it. One is the release of earnings reports for 2020’s fourth quarter—which could lead to some stock-specific volatility. Another is the weekly release of unemployment data, which began trending in the wrong direction last November. Jobless claims remain far above pre-pandemic levels, and hiring has shown signs of slowing.5 Also, the first of eight Federal Reserve meetings scheduled for 2021 will take place this month. Finally, there is Inauguration Day, and all the questions about what Joe Biden’s presidency will mean for the economy and financial markets going forward. Though he’s unlikely to propose any tax hikes while the pandemic is still an issue, raising corporate and payroll taxes are ultimately part of his economic plan. Even though he’s said he has no plans to order another national coronavirus lockdown, that could change if infection rates continue to outpace the vaccine rollout.
The Fed Factor
As for those Federal Reserve meetings, they’re always closely watched by Wall Street. The good news this year is that they’re not expected to have much impact on the markets. As you know, the Fed slashed interest rates to near zero last March in response to the pandemic, and announced open-ended quantitative easing. The stock market loves low interest rates and artificial stimulus, and these measures are likely to remain in place for the foreseeable future. In fact, the Fed has signaled it will hold its benchmark rate to a range of 0 to 0.25% until at least 2023, even if the economy gets back on track and inflation hits its target goal of 2% before that time.6
With low interest rates and artificial stimulus likely here to stay, many analysts believe the stock market will continue to show the kind of resiliency it has shown throughout the pandemic. More new record highs could be in store. However, it seems unlikely stock values could continue notching much higher without real corporate earnings finally starting to catch up in a big way. Could that happen this year? Well, anything is possible. There are some genuine reasons for optimism: vaccines are being delivered, the political picture is more clear, and the economic relief that millions of Americans and businesses need is on the way.
There are also still plenty of major challenges, any one of which could quickly undercut investor optimism and send the markets back into correction territory. Some analysts believe it could happen before April, which—as I’ve noted before—could create a good buying opportunity for certain investors with the right risk tolerance. The bottom line is that it remains essential, especially in this early part of the year, to know that your financial strategy is still aligned with your personal risk tolerance, and set up to help you protect your downside and/or take advantage of potential new opportunities in the coming year!
1“January 2021 Stock Market Outlook,” Forbes, Jan. 4, 2021
2“New Stimulus Package vs. CARES Act: What’s Different,” cnet.com, Dec. 22, 2020
3“Stocks Rally Amid Georgia Runoff Results,” Yahoo Finance, Jan. 6, 2021
4“10-Year Treasury Yield Jumps Above 1% for First Time Since March,” MarketWatch, Jan. 6, 2021
5“Weekly Jobless Claims: Little Changed Despite Signs Hiring is Slowing,” CNBC, Jan. 7, 2020
6“Fed Will Not Hike Rates For Years,” fxempire.com, Sept. 17, 2020