The strength of the first year out of a severe stock market recession in 2020 strangely matched the pattern in 2009—that is, the strength of the first year out of a major stock market slump. While previous success does not guarantee future outcomes, being an active equities investor necessitates knowledge of historical trends. As the market rebounded from its March lows, many investors were overly negative in retrospect, putting far too much money on the sidelines. Volatility fell once the rally started, and the bull market soared dramatically before the bears finally caved in late in the year.
Now, in 2021, despite hopes and enthusiasm that the epidemic will be over soon as vaccinations are provided, investors may find it more difficult to achieve the stock market returns seen last year during COVID-19. Strange as it may seem, stock returns do not have to correspond to the present status of the economy, as we witnessed last year. Instead, stock performance this year may approximate that of 2010, the second year of the bull market that began in 2009. Stocks are anticipated to take a pause after the S&P 500 Index’s astounding 68 per cent gain from the March 2020 bottom to the end of the year, just like they did in the second quarter of 2010. Importantly, as in 2010, the overall returns of a second year in a bull market have generally been good.
In terms of the stock market, we may anticipate a significant increase in volatility in 2021. This is likely to shake out the hesitant bulls, those who have only lately placed their money into equities at the worst possible time. Investors should be cautious and focus on the long term, based on history. The second year of a fresh bull market has a good track record in terms of overall performance, albeit it is more gut-wrenching along the way.
Is the market expensive?
Stocks may look costly on the surface after the great gains of 2020, scaring investors. The current ratio of price-to-earnings of the S&P 500 is high in comparison to its historic significance. Apart from the 1990s tech boom, such a high price multiple has never been sustained in the last 44 years. However, when the earnings yield is compared to the US 10-year Treasury, it becomes evident that the market is actually cheaper.
Looking deeper, the 50 fastest-growing firms in the United States are acting similarly to the corporations that fueled the tech bubble to its height in 2000, with values that are just as inflated as they were before. 2 When you widen the collection to include the 100 fastest-growing U.S. firms, prices are less severe; in fact, they all fell in value late last year, giving investors a chance to profit.
Companies that were most hit by the pandemic-induced recession and whose values are low in comparison to their history, i.e. value stocks3—banks, movie theatres, and cruise lines, for example—might give a tempting opportunity, especially in an economy where the consumer is strong. When the economy is emerging from a recession, it has historically been the ideal time to invest in value companies. These value equities began to rebound in 2020 as a group, but as we enter 2021, they are still cheaper than they have been in the past. 4 We regard value stocks as an opportunity in our current economic recovery, concentrating on firms with robust balance sheets.
What’s my expectation from the stock market outlook for 2021? It might be a good year for stocks in general, but investors should be cautious. That would be typical of a bull market in its second year.