Will the market extend its rally in 2021?

With 2020 now out of the way, and some optimism building across the world for a more positive year ahead, there is also good reason to believe that the market will continue to reward investors throughout 2021.

First, however, it’s worth touching on the magnitude of exactly what we witnessed last year across financial markets.

Despite the deadly Coronavirus pandemic resulting in an enormous health catastrophe, and forcing the hand of governments everywhere to lock down their economies, the market defied all the odds to deliver strong returns.

The S&P 500 overcame a drop of more than one third at the height of the initial panic in March before ultimately finishing the calendar year over 16% higher than where it started, while the Nasdaq gained over 40%.

With that, we really need to put into perspective that the results of the year gone by are more likely to be the exception rather than the norm.

Our forecast for the year ahead sees markets continue their upwards trajectory, but we do want to keep expectations in check and should we see another bumper year, we’ll treat that as a bonus.

There are five key reasons we see the stock market grinding higher over the course of the coming months in 2021.

Vaccine deployment to bolster economies

As we touched on in our last newsletter, we anticipate that the rollout of vaccines will help steer global economic growth back on track, led by the world’s developed economies.

Thus far, it must be said that the rollout of the vaccines have been disappointing due to missed targets, timelines slipping and some production issues also.

Nonetheless, we predict that improvements will be made in these areas, while it is also likely that other vaccines may be approved across the first half that in turn help provide a buffer to meet global demand.

The energy market has already started to show early signs of positivity amid a surprise production cut from Saudi Arabia, and once vaccine deployment picks up momentum, and travel can safely resume, there will be further tailwinds to support this sector.

More broadly, however, we believe consumer sentiment will also be given a much needed boost, underpinning economic growth.

Federal Reserve to maintain fiscal support

Perhaps the clearest turning point in the market recovery last year was the moment where the Federal Reserve effectively stepped in to provide fiscal support that would prop up the economy.

Since then, the central bank has not just maintained the pace of this support, but at times it has even accelerated its bond buying activity and extended its support mechanisms far greater than anyone would have anticipated.

The Fed has also telegraphed that it is likely to offer this support for as long as it takes to help the economy revert back to where it was prior to the pandemic.

With this confidence in place, investors have been all but assured that the Fed will effectively backstop the market in the event that there were to be another event that catches investors off guard, like a double-dip recession.

Low rates are here to stay

Tying in with the Federal Reserve’s efforts to prop up the economy, interest rates are at rock bottom levels.

There is little prospect that this is about to change any time soon. In fact, the central bank has even gone as far as to indicate that rates are not set to rise until at least the end of 2023, if not later.

As far as the economy goes, we can expect that coming out of the pandemic, this is where we will really start to see the effects of interest rates at zero.

Given the likelihood of pent-up demand, as well as less uncertainty, we believe businesses will be well-placed to invest more aggressively to support their underlying growth.

Another round of stimulus cheques

After Congress finally reached a deal to put together a second round of direct support to American households across the country, there was some dejection within the investment community that it didn’t go far enough.

After all, negotiations prior to the election had suggested more than US$2 trillion was on the table at one stage, before a significantly scaled-back deal was struck. There was as much attention placed on the accompanying government spending package, which in itself was criticised in many quarters for various ‘wasteful’ allocations.

In any case, with President-elect Joe Biden set to take office in a matter of days, and a clean sweep of Congress following the Democrats two wins in the Georgia Senate runoffs, expectations are on the rise once again.

Yes, there are some concerns around policy governing higher corporate taxes, which would hit mega-tech companies, an integral part of the market rally, the hardest.

However, the prospect of another round of stimulus cheques and broader relief measures from the government looks increasingly likely.

We may even reach an outcome where the Democrats are able to pass a package equal to or greater in value than that discussed months ago. Already, Biden has committed to a third round of cheques for Americans, expected to be US$2000 each.

This would prove to be a sugar hit for the economy, and much like the first round of support, our view is that this would support consumer spending and reignite retail sales growth.

Opportunity cost, what choice is there?

When we consider the sum of all moving parts, including the particular fact that interest rates are zero, there is a stark question that investors are confronted with. What alternative is there?

With cash offering nothing in the way of returns, and other asset classes like bonds yielding little reward, the stock market has proven to be an opportunity too good to pass up.

Sitting on the sidelines throughout the market rally, or even selling amid the market crash, would have resulted in a significant opportunity cost. Compounded, missing out on these sort of returns can have a monumental impact on one’s savings by the time they reach retirement.

Keeping tabs of all these factors at play, we maintain the position that investors really have no option but to invest in the stock market.

Sitting on the sidelines is not an appropriate consideration for us at this time, particularly when we feel the market has shown resilience amid the most turbulent of times. We look forward to what we expect will be a rewarding year for investors.