For Main Street and much of the country, 2020 can’t end soon enough. But for Wall Street, the year ended on a far cheerier note, as investors chalked up record highs while betting that government checks and vaccinations will further an economic recovery in 2021.
The market’s view of silver linings ahead follows a year that including both a bull market and a bear market. “We’ve had a lot of motion in here, and the economy was disrupted very quickly,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told CBS MoneyWatch.
“We dropped down a third from January 19 to March 23,” Silverblatt noted of the S&P 500’s pandemic-inspired free fall, the most rapid yet.
But that was then. Investors in the S&P 500-stock index are realizing close to 18% total returns for the year, and a majority of that gain stems from just a trio of tech giants — Apple, Amazon and Microsoft. “Fifty-eight percent comes from those three companies, and the top 24 take it away,” Silverblatt said on Wednesday.
The technology-laden Nasdaq composite soared 43.6% in 2020; the S&P 500 ended the year at a record closing high, up 16.3%; and the blue-chip Dow Jones industrials index was up 7.2%, or 2,068 points, to finish the year at 30,606.
“We’re at a better place exiting the year than in September because the rally is broader,” Art Hogan, chief market strategist at National Securities, said of a recent shift from work-from-home stocks to economically sensitive ones. “There’s pent-up demand for things we haven’t been able to do.”
Biggest winners: Etsy and Tesla
Those work-from-home stocks include Etsy, up roughly 330% year-to-date, a gain only topped on the S&P 500 by electric car maker Tesla, up just over 730%, according to Silverblatt’s calculations. Tesla shares further benefitted in December when the highly valued car company joined the 500-stock index that widely serves as the benchmark for the U.S. stock market.
The worst performers include Carnival and Norwegian Cruise Line, both down nearly 60% for the year, reflecting a cruise and travel industry hammered by the coronavirus.
Nine months after the pandemic began, employers are still as coronavirus infections continue to spread, keeping many people at home and prompting state and local governments to reimpose social distancing restrictions on businesses.
“Half the people who lost their jobs in the downturn are still out of work, so the market is predicting a pickup in economic activity next year,” said Hogan of hopes for a respite from the economic fallout of COVID-19 on the labor market. For instance, weekly claims for jobless benefits averaged 1.45 million in 2020 versus roughly 220,000 in 2019.
Silverblatt agrees that investors are banking on relief from a new round of government stimulus checks as well as COVID-19 vaccinations, but wonders whether they are getting ahead of themselves, in terms of how quickly any return to normalcy might occur. As he puts it: “This market’s nuts; there’s a lot of optimism in there.”
He cites a trend of individual investors as opposed to professional money managers getting into the market starting in November. “People want to buy in, we’re building for the second half to be great.” But should the bounce back fail to materialize as expected, Silverblatt foresees a time of reckoning for equities in the coming quarters.
The easy part of 2021 is forecasting the direction of economic growth and earnings, the hard part is predicting what the right price-to-earnings ratio for stocks will be, according to Peter Boockvar, chief investment officer at Bleakley Advisory Group. A price-to-earnings ratio, or P/E ratio, is used to determine whether a company’s stock price is high or low relative to that company’s earnings growth. “Should it [the stock price] be 22 times [earnings]? 18 times? 15 times? 25 times?” Boockvar asked. “There is a wide dispersion in possible S&P 500 outcomes depending on that.”
Global stock markets closed out the year near record highs and the dollar holding at two-year lows.
The greenback’s weakness has “sort of gone under the radar with everything else going on but I think it has the potential of becoming more relevant in 2021 as this is the initial venue that reflects market thoughts on the ever-widening U.S. debts and deficits,” Boockvar wrote in an end-of-the-year client’s note. “Further weakness of note would then have implications for inflation and long-term interest rates.”
Interest rates are expected to move higher as the economy rebounds further with a vaccine.
Commodity stocks — specifically oil, gas, agriculture and copper — continue to be favored by Boockvar, who also likes “precious metals, bank stocks, value stocks that technology and Amazon haven’t killed off, some travel and leisure names, emerging Asian stock markets, and the U.K. and Turkey, too.”