2020 has been one of the most unusual and tumultuous years in American history. Covid-19 struck with little warning early in the year while the highly contentious national election approached with lots of forewarning late in the year. Neither circumstance played out in the markets as many figured, which reinforces the notion that you cannot confidently predict the market’s next moves. This drives home the point that it is critical to always be ready for good times as well as hard times in the markets, stay invested during uncertain times and, if you can, even add to your investment holdings during those times of panic.
With the election settled and vaccines for Covid to be distributed, 2021 offers the possibility of better days as we move through the year, but that doesn’t necessarily mean the investment world will reflect that. Many expect 2021 to be a good year for the markets and I generally agree that scenario has a reasonable chance to play out. That would be welcome news. However, it is important to always be ready for the unexpected, including the markets perhaps stalling out or going down even when times get better overall. Wall Street and Main Street don’t always directly correlate, as we’ve just seen in 2020.
By the end of last year, most all parts of the market had moved higher and some quite substantially (hello NASDAQ). The Fed can certainly be thanked for this benevolent environment as interest rates were pushed to near zero in March, making other investments comparatively more attractive. Further, the Fed actively backstopped large parts of the bond market, and even to a degree the stock market, while indicating it would continue to do so going forward. Panic quickly dissipated. Most, including me, still did not expect such a quick and full recovery from March’s lows, especially since Covid has yet to be brought under control. Yet here we are, and happily so, even if it feels somewhat tenuous.
Is the Market in a Bubble?
As we hit new market highs, the stock market’s price/earnings (P/E) ratio for the S&P 500 is near an all-time high of roughly 24, which is significantly higher than the long-term average of about 17. This would certainly suggest the stock market is currently very inflated.
However, if you remove the 6 largest members of the S&P 500 (i.e.: Apple, Amazon, Google, Tesla, etc..), the average price/earnings ratio of the other 494 companies is about 17…the long-time market average. Thus, it can be argued the overall market is not that dearly priced – but the biggest of the big companies are. Is this justified? In a way, yes, as these companies dominate their markets and see further growth; however, as strong as these companies are, it doesn’t mean the market will continue to give them such a premium price, particularly if their growth rate starts to slow. Keep these facts in mind as we move through 2021.
Investing with Covid Relief Money??
Research shows that one of the top uses of ‘stimulus’ checks issued to Americans in the spring was to invest in the stock market. This is very disappointing given the goal of distributing that governmental money (future Americans’ taxes) was to keep people who were impacted afloat financially and to boost the economy in the face of Covid. It was not for people who don’t need the money to sit home and invest in the stock market. Unfortunately, a 2nd set of checks were distributed around year-end in a similar way instead of focusing the relief money on those who have lost wages or jobs and not to most anyone, regardless of circumstance.
Now that I’m off the soapbox, the fact that many invested their government checks speaks to the current state of the stock market. It is filled with optimism – some of it reasonable but some perhaps not. Investors seem to be quite willing to ‘look beyond’ the economic fall-out due to Covid and are focusing on when we get back to some version of normal, likely sometime in 2021. This seems reasonable.
However, there is a second level of optimism fueled by the speculators on trading sites such as Robinhood, where people with extra time on their hands and cash in their pockets (from stimulus checks or from not traveling nor eating out) are pushing that money into the stock market. Research shows these folks are not buying traditional stocks such Johnson & Johnson or 3M, but are focusing on stocks (and even higher-risk options) of go-go companies such as Roku, Tesla, Peloton and Zoom – adding to these stocks’ meteoric rise.
The 2020 political cycle has revealed that many Americans seem set in their ways of thinking and cannot see or understand the perspectives of Americans on the ‘other’ side (whichever side that may be). I’m a strong believer that it is important to take both perspectives into account as one side of the aisle is not always correct and can in fact be dangerous if they think they are. The same perspective holds true for investing. Currently, it seems the stock market translates most business and economic news as some version of positive. Unemployment down? Great! Unemployment up? That’s also great, as that likely means the Fed will continue its sympathetic stance and actions.
This rosy-glassed, one-viewpoint perspective has kept the market going up and up. This is great in general and I’m not complaining, but I’m not sure it makes sense nor should be interpreted as a green light to invest at will. Markets have a way of taking quick detours, leaving its passengers sometimes nauseous and bruised. It’s always wise to see both sides of the investment world – what can go right and also what can potentially go wrong.
What of the 2021 Stock Market?!
What should be expected in 2021? Of course, as we all should realize, the answer is ‘no one truly knows!’. You just cannot predict stock market performance with great accuracy from year to year. That said, there seems a reasonable chance the market will end higher than it begins simply because we should be in a better place with Covid over time and the economy and our psyche should benefit. However, few would’ve expected 2020 to end near all-time highs given where we were in late March. Therefore, even though most market prognosticators are forecasting a good 2021, keep in mind that we could see a different market as well.
I’m optimistic for this year and the market, but I wouldn’t bet my last dollar on it. Instead, I would chart an investment path that will see some growth if the market continues to be benevolent, but won’t crater if market headwinds pick up considerable speed, which can always happen and likely would do so without what we’d consider adequate warning.
Brian Weisman, CFA, CPA, CFP, CMA