2020 was a tough year for the world. COVID-19 came out of nowhere and completely disrupted our lives, the global economy and markets. Despite that enormous challenge stocks fought through the adversity and delivered impressive returns.
- The S&P 500 (SPY) delivered a total return of +18%.
- The tech heavy NASDAQ 100 (QQQ) gained an incredible +48%.
- The Vanguard Global Stock Market (VT) gained +14%.
- Emerging Markets (EEM) gained +16%.
Take a look at the chart below.
Stocks Will be Volatile in 2021 – But I am Expecting Another Solid Gain
Looking forward into 2021 the stock market will face plenty of new and lingering challenges.
- COVID 19 will continue to pose a risk to economic growth and social stability.
- After huge gains in 2020, the tech sector is trading with a historically high valuation.
However, despite these challenges I am expecting stocks to deliver another gain in 2021. I am not expecting a massive gain like we saw in 2020 – but I do think the S&P 500 will gain between 10% and 15% in 2021. Here’s why.
Upward Momentum: Global stocks have strong upward momentum right now and that is a positive signal for more gains.Here are some more details from Reuters.
In prior bull markets, when the S&P 500 takes out its previous bull market high, the index has experienced a median gain of 38% over the span of 26 months before topping out, according to Bespoke Investment Group data.
Global Economy Will Continue to Recover: The global economy will continue to recover in 2021 and that should be very good for stocks Here are some more details from Bloomberg.
The most upbeat are the analysts at Morgan Stanley, who predict an expansion of 6.4% in the coming year and maintain their call for a V-shaped recovery. Less confident are the economists at Citigroup Inc., who predict growth of 5%. Both would be dramatic improvements on the 4.4% contraction the International Monetary Fund has penciled in for 2020.
Central Banks Pumping Trillions into Global Economy: Global central banks are pumping trillions of dollars into the global economy is order to compensate for COVID-19 and stimulate more economic growth. In 2020 the four largest central banks in the world, (US, Europe, Japan, England) pumped $8.5 trillion into global markets. In 2021 Morgan Stanley predicts these four central banks will pump another $3.5 trillion. That should be a strong catalyst for global economic growth and stocks.
Here is the Plan for 2021
There is a time to be aggressive with stocks and there is a time to be patient. Right now is the time to be patient.
The broader stock market looks a little over bought in the short run. The tech sector looks even more overbought.
My plan is to be looking to buy stocks on any weakness or pullbacks. For example, if the S&P 500 sees a small pullback of 5% I will be looking to send cash into the market and buy low.