2020: What Just Happened? — Outlook
2021: Stocks Only Go Up?
What to Watch for in the 2021 Stock Market
Disclosure: We at Tragen are not Registered Investment Advisors, and what we express below should not be interpreted as financial advice. All opinions are solely our own with rights reserved.
How Do We Recover?
If you’ve made it this far in the series, congrats. 👏
It was a lot to get through— hopefully you got something useful out of it. Now that 2020 is (gratefully) past us, how should we think about where we find ourselves in 2021?
Here are some of our thoughts on what to think about in 2021:
- We’ve lost a lot, and will lose more before it’s over
- Herd immunity will take time, which is problematic for Recovery
- There is plenty of fresh kindling for the market, but debt is soaring
- It will hard to be go back to who we were before, so expect some changes
In quick summary, we’re going to be optimistically cautious. While stocks as a collective have historically gone up in the long run, in the short term they may not. If 2021 follows the volatility trend, the year could be highly volatile and full of road bumps that cause panics and sell offs.
Honestly, the only thing we can recommend is perseverance with a long-term mindset. As a species, we’ve bounced back in the face of adversity. If you can see past 2021 and into 2022 and beyond, we can realize a recovery.
We’ve lost a lot, …
…and we will lose more before it’s over. The Coronavirus Pandemic has already claimed 400,000+ lives and loved ones in the US, and 2 million globally. This is a staggering loss of life, and this number could double before the end of 2021. There is no way to replace people that are lost to us forever.
Many businesses (big and small) have closed permanently, with no plans to reopen. Some storefronts may continue to be emptied and could remain vacant for years to come as new investment into traditional retail could be muted in the Pandemic’s aftermath. Millions more than normal are unemployed, and may never economically recover.
The Global Economy is also in dire straits. Although we’ve begun to recover sharply from the first half of 2020, economists still project that the global economy at the end of 2021 will be 6.5% smaller than it was prior to the Pandemic.
Herd immunity will take time, which is problematic…
…for Recovery. While there are now two vaccines authorized for emergency use in the US, and more to come in the pipeline, we are still in the thick of it. The second wave of infections has only proven that controlling a highly infectious virus, while attempting to fully reopen the economy is near impossible. The economy could continue to see disruption from the Pandemic far into 2021.
The mass vaccination efforts of governments, both national and local, have seen headwinds due to the overstrain of our healthcare systems and insufficient government planning. The availability of receiving a vaccine is proving scarce. There is hope that we can greatly improve on this, though help couldn’t come faster.
Let’s do the math. If we vaccinate 1 million people every day at a constant rate, it could still take up 9 months (and 240 million people vaccinated) to achieve “Herd Immunity”. Moreover, a significant portion of the US population have stated skepticism on taking a vaccine, which could only further delay total re-openings.
There is plenty of fresh tinder for the market, but also…
…debt is soaring. Money flow is aplenty for the near-term future. But Wall Street has already largely factored in individual payments (and future ones) in terms of M2 Money Supply. This obviously could bode well for the Stock Market as yields remain historically low and investors continue to seek return.
But money is not free — US National Debt currently exceeds $27 Trillion, which is 1.5x America’s GDP. Though the Federal Reserve can continue purchasing US Treasuries, at some point the market may demand more return from Treasury investments, causing pressure on interest rates.
While the Federal Reserve has signaled that it will keep interest rates close to zero for the foreseeable future, reopening could cause a spectacular surge in consumer demand and subsequent inflation. In the event of high inflation, the Federal Reserve may choose to raise interest rates, which would draw capital towards bonds and away from equities — bad for the Stock Market.
And we are immensely lucky in the US to be able to print money at such low rates. Many nations are unable to raise debt without risking unsustainable inflation. In the future, poorer nations could struggle to repay the debt they issued during the Pandemic, which could make for new debt crises across the world.
It Will Be Hard to be Go Back to Who We Were Before, so…
…expect some changes. We all need a vacation. Who wouldn’t take the trip to go laugh unmasked with loved ones distanced over last year? And while we’ll be looking forward to it, it’s also important to realize that the economy is the sum of all behaviors.
In truth, it’s hard to estimate how we will collectively shed the behaviors we’ve adopted during the Pandemic. If 20% of Americans (who could do so before COVID-19) feel that it’s dangerous to travel or dine out after we achieve “Herd Immunity”, this will continue to hamper overall demand.
One thing to be certain of is that as a nation, there’s no going back to where we were at in 2019. This isn’t to say we won’t spend more, or the economy won’t grow. We will… but it will likely in be in different ways. Electric vehicles, houses and video games dominated spending in 2020. Who is to say that this trend won’t sustain?
Moreover, the Pandemic has also laid bare the distinct divide between those who have and those who do not. Spending on goods have skyrocketed but spending on services remains depressed. The K-Shaped recovery could continue and even accelerate.
How workers, consumers, and companies will react in response to a post-COVID world remains to be seen. While there are hopes that the US economy will thrive due to pent up demand, some behaviors and trends, such as partial WFH or spaced-out offices, could become a permanent fixture for the foreseeable future.
And, even if the US achieves “Herd Immunity” sometime later this year, much of the rest of the World could still be vaccinating and restricting movement in and out of national borders. This obviously constricts the flow of commerce as consumers are forced to spend (and vacation) locally. While this may sound good for local producers, the lack of visitors to the US could further hamper the recovery.
All of these drivers could mean systemic changes, which requires deep reflection for investors. One thing we’d recommend doing is thinking about how the world is today during the pandemic and imagining how it would change if COVID-19 was eradicated in just 9 months. What would change and what wouldn’t? There will be much celebration with spending of old, but also permanent changes to how we live.
Ultimately, trading in the Stock Market is equivalent to a fool’s errand of prognosticating the future. Though even fools can be right, nobody knows what will happen for certain. But ideas are based off of what you know and the indicators that are readily available to the market.
Despite all the doom and gloom expressed above, we at Tragen are actually optimistic for 2021. The world has recovered before from catastrophe, and we will continue to do so in the future. For its part, the Stock Market is truly one barometer for Human belief. The needle currently points to highly optimistic, whether warranted or not.
But as we’ve covered throughout this series, it’s not as simple as “Stocks Only Go Up” in 2021. And we hope to be with you, charting the Markets in 2021 and beyond along the way.
