As the year nears its end, it comes as no surprise that the coronavirus crisis will remain the main focus for stock markets in 2021. How are the U.S. markets placed to perform in the coming year? What are the factors or sectors to watch out for? What are the risks involved? Here, we would cover a broad range of topics that include:
- How markets have remained resilient in 2020 and staying invested for the long term is the key
- Road to economic recovery
- Promising opportunities for investors to seize in 2021
- Potential risks
With the COVID-19 pandemic ravaging businesses around the world, stock markets in the United States remained buoyant. Among sectors, pharmaceuticals, biotech, technology, and media and telecommunications (TMT) have returned more money to shareholders than the pre-pandemic era. Technology companies, especially the “Big Five,” have been the “thrivers” driving up the market’s aggregate shareholder returns. (Figure 1)
Figure 1: Shareholder returns by Industry in 2020:
While the pandemic’s long-term effect on share prices may not be so large, investors should realise that it could take two-to-three years to restore normalcy. Against this backdrop, staying invested in the markets for a longer term is the key learning from the pandemic. Those who sold in the market correction during March have missed out on the whole recovery that took place in the second half of 2020.
Stronger COVID-19 recovery rates and vaccine rollout to help overcome the virus
COVID-19 cases in the U.S. have touched 19,977,704 with 346,579 deaths as of 30th Dec 2020, while recoveries stood at 11,844,472 during the same period. Amid these surging infections, the U.S. Food and Drug Administration (FDA) issued an Emergency Use Authorization (EUA) to Pfizer -BioNTech’s COVID_19 vaccine to be distributed in the United States. The whole of the U .S. population is likely to be vaccinated by Q3-Q4 2021. (Figure 2)
Going into 2021, positive COVID-19 vaccine developments and an ongoing economic recovery are likely to lift equity markets higher. The factors which would likely determine how the recovery unfolds include:
- The scale of the ongoing COVID-19 resurgence going into 2021 and the resulting lockdowns.
- The timing and availability of the COVID-19 vaccine.
- The size and timing of additional fiscal stimulus and its impact on spending and economic growth.
Figure 2: Probability of likely end to COVID-19 in the U.S.
Additional fiscal stimulus likely to be a big boost to the economy and markets
The government stimulus of $908 billion as an emergency aid bill has given a necessary boost to the retailers for a faster revival. This is being witnessed by the increasing consumer goods’ spending that has bounced back to its pre-pandemic levels. Retail stocks, with strong businesses like Home Depot (HD), Target Corporation (TGT), Walmart (WMT), Lowe’s Companies (LOW), are the biggest beneficiaries of this stimulus. Investors can now look forward to another stimulus package of $500 billion that will address small businesses, vaccine distribution and unemployment provisions.
The real GDP forecast is likely to expand to 3.4% for 2021 (as per Economic Forecast for U.S. Economy, Dec 2020) and the monthly economic output will probably return to pre-pandemic levels in October 2021 (Figure 3).
Figure 3: US Economic Outlook: 2021
Potential Opportunities in 2021
Stronger Earnings growth projected for S&P 500 in 2021-22:
The 2021 earnings forecast as projected in the S&P 500 earnings growth estimates shows a growth of 40% in 2Q of 2021, compared with a decline of 30% year-on-year in the 2Q of 2020. (Figure 4).
Figure 4: S&P 500 Earnings’ estimates for 2021-2022
The “Big Techs” are likely to exhibit stronger revenue and earnings’ forecast (Figure 5) in 2021.
Figure 5: Revenue and EPS growth forecasts for Big Techs for 2021:
SaaS takes center stage
Worldwide lockdown encouraged people to work from home that helped cloud-based software stocks soar significantly. Amazon (AMZN) and Zoom Video Communications (ZM) were the biggest beneficiaries among those. A few of the high growth tech-stocks, especially SaaS (software-as-a service) stocks like Service Now (NOW), Atlassian Corporation (TEAM), Nuance Communications (NUAN), Adobe (ADBE), Salesforce (CRM), Slack Technologies (WORK) are likely to see substantial growth in 2021 as the cloud is here to stay. The whole idea behind SaaS is to put the software on the cloud and allow subscribers to access the software from any device. As most companies adopted a remote working culture, the ease and flexibility of adopting SaaS came in handy during the pandemic.
COVID-19 vaccine shot for pharmaceuticals, cold-storage and distribution companies
Vaccine makers Pfizer (PFE) and Moderna (MRNA) are the direct beneficiaries from the vaccine announcement, but companies working on therapeutic drugs like Regeneron (REGN) will benefit too. Pfizer has begun transporting the vaccine from its manufacturing facilities to United Parcel Services (UPS) and FedEx (FDX) facilities which are distributing the vaccine and operating in this supply chain logistics. FedEx is currently handling 500,000 dry-ice shipments each month to keep the Pfizer vaccine at ultralow temperatures.
Biden’s green Push
President-elect Joe Biden has proposed a spending of $2 trillion in his next four-year term to combat climate change. His target to install more than 500,000 electric vehicle charging stations by 2030 is positive for electric vehicles (EVs) sectors. Some of the large ETFs in this sector include the iShares Low Carbon Target ETF (CRBN) and iShares Global Clean Energy ETF (ICLN)
Cyclical stocks could see a comeback
Cyclical stocks, which have been the most sensitive to an economic recovery, have added to the recent rally amid the promising vaccine news. Good-quality cyclical companies with great management are likely to have substantial upside over the next 12 months in sectors like autos, homebuilders, materials, industrials, financials, and consumer-discretionary.
Embrace portfolio diversification in 2021
A look at the 2020 monthly sector performance shows sector rotation has had many flavors: from growth to value stocks, from large-cap to small cap, from defensive to cyclicals, from stay-at-home stocks to get-out-and-about stocks and from leaders to laggards. Investors should make the most of these sector rotations by remaining diversified and not tied to one particular theme or group of stocks.
Risks to market
Slowdown in Fed spending and quantitative easing (QE)
Quantitative Easing (QE) which is primarily the U.S. Federal Reserve’s bond-buying effort has a major impact on market sentiments. Markets virtually respond to any news by the Fed — they tend to rise when the central bank announces an expansionary policy and fall during a contractionary policy. The $4 trillion QE in early-2020 has inflated stocks (Figure 6). It would be interesting to see if the market sentiments would be dampened when the Fed decides to further slowdown the stimulus package post the vaccine in 2021.
Figure 6: S&P 500 and Nasdaq 100 gains with and without Quantitative Easing (QE)
Another major risk for the markets could be the deteriorating trade relations between China and the United States. An extended trade war could be more bad news for the markets and the overall economy. Trade policies under Biden are likely to put pressure on U.S- China trade relations as the tariffs on trade flows are to remain in 2021. Businesses may hold off from new investments until a trade deal is in place and the U.S. and China resolve their differences.
Monetary and fiscal stimulus have set up the economy and the financial markets for a highly anticipated recovery, while the rollout of vaccines has only amplified the upbeat sentiment. Biden’s swearing-in as the newly-elected President in January will bring about new policies and reforms outlined for the next four-year term, which also calls for a huge impact on the market and the sectors that will come out strong as an outcome of these changes. The eagerly awaited vaccine and the expected earnings rebound will additionally give cues to markets for the next leg of the 2021 rally. For now, investors can only wait and watch for these changes to unfurl before unleashing their market-winning strategies.