Traders work on the floor of the New York Stock Exchange.
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The stock market looks set to rise in 2021 – a year that should see a return to normal, above-trend economic growth and a higher stock market, according to Wall Street strategists.
Even with this year’s massive selloff, the S&P 500 is posting a nearly 15% gain for 2020. For 2021, many strategists expect another year of double-digit gains.
CNBC investigators expect an average year-end 2021 target of 4,056, a gain of about 9.5% from current levels. But some strategists, like Fundstrat’s Tom Lee, expect a more consistent rally in 2020. Lee sees the S&P rising to 4,300 from its current level near 3700.
Vaccines are expected to free individuals from pandemic restrictions and, in turn, free the economy as 2021 progresses. Working from home should come back to working at the office; films will be shown in cinemas; diners will eat in restaurants and a large number of people will no longer be afraid to travel.
But the road to this second half scenario is not smooth. As the virus spreads and hospitalizations hit record highs, the economy is showing signs of slowing. The labor market is weakening and weekly jobless claims have climbed to September levels as restaurants and other businesses close or downsize due to the pandemic.
“The closures will be very targeted. It has nothing to do with what you saw in the spring,” said Ethan Harris, head of global economic research at Bank of America. “It’s going to eat into the economy in the next few months. You come in with this big loss of momentum to start the year. Then you look at the spring and there’s … reason to be optimistic.”
Along with this view of the economy, equity strategists expect the market to have a rough time early in the year before recovering.
The coming week
Stocks last week were higher, with the S&P 500 rising 1.3% to 3,709, near a record high in trading on Friday. As Christmas shortened by the holidays approaches, traders will be watching the upheaval from the massive rebalancing of the S&P 500 that accompanied Tesla’s entry into the index. Tesla is trading for the first time as part of the S&P Monday morning.
“We’ll see if there is a sale of Tesla after the fact. Investors had to buy Tesla, so we might see Tesla sell once it gets absorbed into the S&P, ”said Quincy Krosby, chief market strategist at Prudential Financial. Index investors and funds that own the entire S&P 500 would cut holdings of other stocks to make room for Tesla, and this trading could result in a volatile Monday morning.
Krosby said shares are expected to rise later in the year unless Congress manages to come up with a stimulus package or there are surprise setbacks for Covid vaccines. On Friday, Congress was still fighting over a bundle. “At this point, the vaccines are a stimulant,” she said.
Strategists expect a relatively calm week for equities, and the bond market is also expected to be subdued as investors complete year-end trades after the Fed meeting last Wednesday. There are housing data Tuesday and Wednesday, and unemployment and durable goods claims on Thursday.
Then, of course, there is the focus on the New Year.
First shift retarder
“The first quarter is typically the most difficult from a GDP perspective,” said Michael Arone, chief investment strategist at State Street Global Advisors. He said the earnings season is about to begin and there is potential for a negative outlook. “I think we need a correction at some point in the first quarter.” Arone expects a 5-10% pullback and says the stock market may have made some of its gains in 2020.
Lee of Fundstrat, who was one of the first to call out the March rebound, says he is looking for a 10% correction between February and April, before the market recovers and soars.
A major wild card is looming for the market in the early days of the New Year. Polls show that the January 5 Senate elections in Georgia are very close and have the potential to shift control of the Senate. Political strategists say it’s more likely that the GOP will retain control, winning one or both seats, but if there is a shocked surprise from Democrats, it could dramatically change the political agenda.
If the Democrats win, each party would have 50 Senate seats, and Vice President-elect Kamala Harris would vote for the tiebreaker.
“The Jan. 5 runoff in Georgia is an important event for the market, and for now it is near. It is important because of the consequences. The expectations are that if Democrats win, the market will sell,” Krosby said.
But that could be a short-lived reaction since the market would also see the potential for a bigger stimulus package from Democrats.
“But I think as the fiscal stimulus rolls out, and it’s pretty clear you’re going to be in the high end, I think the market will like it,” said Harris of Bank of America. .
Whether it gets a lot of stimulus or not as much, the economy is still expected to rebound.
In an environment where the economy is recovering and central bank policy is easy, strategists expect cyclical stocks to do well as the market eagerly awaits the second half of the year. By then, several million should be vaccinated and the economy should grow.
“Given fiscal and monetary policy, low rates and the eventual end of the pandemic, it’s hard to ask for something terrible to happen, at least from a market perspective,” said Arone.
Arone said investors have yet to hold high organic growth stocks as well as cyclical stocks that will do better if there is a recovery. Lee said he favors industrials, energy and discretionary sectors for 2021, but also still likes big tech with solid earnings, like Apple and Alphabet. He expects a shake up in some of the home stocks, especially those that don’t have strong earnings streams.
The virus will continue to stimulate the economy over the next year, but the difference in 2021 is that the vaccines are expected to be distributed to the point where they could have a favorable impact on the economy from the second quarter. Harris said the economy would get a boost once hospitalizations and the death rate drop from high levels.
He expects first quarter growth to be around 1%, but in the second quarter, growth is expected to rebound to 7%.
In the CNBC / Moody’s Analytics survey of economists, growth forecasts for 2021 are on average 4.4%, after an expected drop of 3.5% this year.
If Congress approves a stimulus package this year and another next year, that should give the economy a substantial boost. Harris said a stimulus of $ 500 to $ 1 trillion equates to about 2.5% to 4.5% of GDP.
“If you put stimulus like this in the open economy, that’s a big boost,” Harris said.
Economists are eagerly awaiting a period in 2021 when the economic recovery could boost inflation above the Fed’s 2% target, but it is not expected to stay at that level. But even so, strategists look to the cyclical names of energy and materials to be successful in this environment. Bank of America strategists have already identified a group of stocks that perform well in an inflationary period that outperform some that don’t.
Calendar for the upcoming week
Tuesday (every hour ET)
8:30 am Final reading of Q3 GDP
10 a.m. Sales of existing homes
Wednesday
8:30 a.m. Personal income
9 a.m. FHFA real estate prices
10 a.m. Sale of new homes
10 a.m. Consumer sentiment
Thursday
8:30 a.m. Unemployment claims
8:30 am Durable goods
1:00 p.m. Closing of early Christmas Eve for the stock market
Friday
Markets closed for Christmas holidays
