2021 Stock Market Outlook

By Michael Flower, CFP®, Managing Director and Partner, Hightower Financial Principles On Jan 4, 2021

Brexit, a presidential impeachment, wildfires, locust swarms, a global pandemic, a Russia-Saudi oil price war, tensions rising around social justice, a global recession, a presidential election, and let’s not forget a national shortage of not just coins—but toilet paper.  History books will need an entire volume dedicated to 2020.

Fears of a global recession, which came to be, sent equity markets reeling in February and March.  However, sound bedrock financial principles of not making sudden or sweeping changes to your investments and financial plan during difficult times, and continuing to make regular investments (dollar cost averaging), rewarded investors in 2020.

Record-setting monetary and fiscal stimulus helped to prop up markets and send them to new highs closing the year markedly higher.

The market returns were uneven though.  For restaurants, hotels, retailers, airlines and many small businesses, 2020 was the worst of times.  But at the opposite end of the spectrum, the “lock-down” economy of cloud computing, e-commerce, video streaming, digital payments, and home improvement has been booming, realizing growth rates otherwise unpredictable.

The major questions for 2021 are: “How much of the growth in these stay-at-home friendly areas of the market was purely COVID-19 driven?”; and, “Have they gotten too far ahead of themselves to maintain their growth as economies begin to reopen?”

As we enter 2021, we see a critical turning point as to whether there is a vaccine assisted defeat of the COVID-19 pandemic leading to a resurgence of global economic growth, along with a transformation of how we live and work.  Accommodative fiscal and monetary policy will make fixed income investing a challenge and, if they are not properly maintained, could create a long-term inflation concern.  However, they create a supportive backdrop for equities to continue to rise.  We are cautious, though, as valuations are a bit lofty given current earnings.

As mass inoculations begin to be administered and herd immunity achieved, hopefully towards the second half of 2021, we do believe there is a great deal of pent up demand for recreation, travel, leisure, and retail.  We believe that these areas of the market may show a recovery in 2021 on expectations of a reopening, even if only at limited capacity.

With that said, we are cautious in the growth and technology areas of the market as many of the formerly unknown, now household, names in videoconferencing and cloud computing have an uphill battle in keeping their growth in a reopening economy.  While many will likely continue to grow, and do well as work-from-home becomes a more available option, the 2020 rising tide in those sectors won’t lift all, and many companies may have a hard time keeping up with the inflated long-term growth projections that markets have now baked in.

The post-COVID world is going to look different than where we were in the beginning of 2020.  Companies are going to be forced to be more efficient and adaptive.  As investors, we are going to need to do the same and be more selective to identify areas that can recover quickly and flourish post-COVID and also areas of the market that not only benefited from the lock-downs, but can adapt and continue to flourish in a post-lockdown economy.

As we saw bedrock financial principles reward patience in an extremely volatile 2020, we continue to urge investors to take the headline noise out of the equation and remain committed to their long-term financial plans. There will likely be additional volatility in 2021 on the political front and as the world continues to grapple with COVID-19 through the winter and until there are mass inoculations.  Nonetheless, we advise clients to remain committed to their long-term financial plans.

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