As is typical in the stock market, 2020 was another unpredictable year. In addition to the sharpest selloff in market history in February and March, markets also staged the fastest-ever recovery out of a bear market. However, specific events also caught many market pundits by surprise.
Consider the wild ride in Tesla shares. The electric vehicle maker soared more than 500% over the course of the year, and with, burning short-sellers and propelling Elon Musk to the ranks of the world’s richest. On the other end of the spectrum, countless retail and restaurant chains were forced to file for bankruptcy due to the ongoing effects of coronavirus-induced lockdowns and reduced consumer demand.
The one certainty in the stock market is that there will always be surprises. Here’s a look at what some analysts and economists predict the market has in store in 2021.
Prediction: The Market Will Continue To Soar
In spite of a booming stock market in 2020, some experts believe that 2021 will be a strong year as well. The bullish case leans on the massive changes that the world has experience in 2020. Specifically, the global fiscal and monetary response to the coronavirus pandemic has resulted in unprecedented low interest rates, and a flood of stimulus money has reached Americans’ pockets. With the rollout of numerous coronavirus vaccines, the promise of new stimulus packages and a reduction in market-harming trade policies thanks to the recent election, markets could easily continue to run higher in 2021.
Action: Stay the Course
If your portfolio has posted strong returns in 2020, then staying the course might lead to further gains in 2021. Although there will always be things to worry about when it comes to the stock market, this “wall of worry” can sometimes have a positive effect on Wall Street. For example, when everyone has already bought into the market, there’s not much cash left to fuel further gains. But when some investors sit on a pile of cash out of fear that a bull market can’t sustain itself, that money eventually has to go somewhere — especially when “fear of missing out” kicks in. Investors who avoided the stock market in 2020 might jump back into the market in 2021, especially if they have new stimulus money in their pockets.
Prediction: Value Stocks Will Come Back
Stocks are broadly categorized into two types: growth and value. Growth stocks are the high flyers that grab the lion’s share of headlines, promise robust financial returns, and include high-profile names like Netflix, Uber and Facebook. Value stocks — which include most energy, utility, financial, health care and basic materials companies — are often dividend-paying, slow-growth firms with unspectacular share prices. Growth and value stocks typically run counter to one another on Wall Street, with the former performing better in up markets and the latter doing well in down markets.
In terms of stock returns, growth stocks have been walloping their value counterparts since 2007. Some analysts think this trend is due for a major reversal starting in 2021.
Action: Diversify Your Portfolio
It’s hard to sell stocks when they seem to go up every year. Market leaders like Facebook and Amazon have been helping drive this bull market for years, but how long can they continue to keep setting new highs? You don’t have to unload all of your high flyers, but if you believe the growth/value cycle might be shifting, you owe it to yourself to pick up a few “boring” value names. At the very least, you’re likely to make your portfolio less volatile.
Prediction: Inflation Will Hit Consumers and the Markets
Low interest rates and stimulus money have been great for the American economy in many ways. Record numbers of Americans have been buying houses and refinancing their mortgages to take advantage of low rates, and savings rates are quite high, historically speaking.
While all of these things are great, at some point, some analysts feel this combination of factors has to result in rising inflation. Housing prices have already begun ratcheting higher, and as soon as American feel confident to spend their savings again, that flood of money could drive prices up for any number of goods and services.
Action: Take Some Profits/Hedge Your Risk
An old adage in the stock market says that “you’ll never go broke taking profits.” If you’ve got big gains on the books, it might be time to cash those profits in., especially if you feel that inflation might be lurking right around the corner. If you’re like many who already believe that housing is in a bubble and that the stock market isn’t far behind, booking large gains and preparing to reinvest during the next downturn might be a solid risk-avoidance strategy.
Prediction: A Double-Dip Recession Will Strike Early in 2021
Recessions are an inevitable part of the business cycle, so it’s no surprise that some economists have spent the last couple of years warning that the bustling U.S. economy would finally hit the skids. So far, that hasn’t really happened, at least in the traditional sense. The coronavirus-induced recession in early 2020 was self-imposed, as lockdowns and stay-at-home orders decimated the economy. Although things looked like they were taking a turn towards the better over the summer after the Thanksgiving holiday cases skyrocketed to their highest levels ever. Heading into the winter season, cases may continue to rise, as it may be the springtime of 2021 before vaccine distribution is widespread.
Action: Review Your Asset Allocation
Since predicting economic cycles is an inexact science at best, it’s not usually prudent to adjust your portfolio on the expectations of a recession. But considering how long it’s been since the last recession — and the fact that you likely have sizable gains in your investment portfolio if you stayed in the market throughout the bull run — it might be a good time to review your current allocation to see if certain parts have gotten out of balance. For example, if your aim is to have 60% of your portfolio in stocks but found that they’ve grown to around 90%, it might be a good time to trim your position in stocks so they’re more in line with your original investment objectives and risk tolerance.
Prediction: Bitcoin Will Explode
Bitcoin has had a wild ride. It rose from near-obscurity at the beginning of the decade to a peak of nearly $20,000 per coin in late 2017, then dropped below $3,200 a year later before rebounding. After a mid-December surge, Bitcoin is back up above its $20,000 level. Because Bitcoin is a confusing investment that doesn’t trade on any publicly regulated exchange, many investors fear putting their money into it. However, some analysts predict Bitcoin’s price will soar well into the six figures within the next couple of years.
Action: Own Some Bitcoin
Before investing in Bitcoin, do your own research on how it works, what it’s used for and whether it matches your investment objectives and risk tolerance. Only then should you dabble in Bitcoin or any other cryptocurrencies. In the meantime, consider this: Even with all its volatility, Bitcoin’s price has risen more than 20-fold over the past five years.
Prediction: Historical First-Year Presidency Trends Will Prove Accurate
Historically speaking, the first two years of a presidential term are the worst-performing for the stock market. The first year of a presidential term is often where bear markets begin. If these trends hold true for the Biden presidency, 2021 could be a rough year for the stock market.
Action: Tread Cautiously
With a new president in the White House in 2021, historical trends suggest that markets might struggle in 2021. Part of the reason for this historical trend is that presidents tend to be aggressive in pushing forth their agendas in the early part of their presidencies, leaving the second half to stimulate the economy and juice the markets. Nothing is set in stone, but if you’re a believer in this trend, you might want to trim some risk from your portfolio in 2021.
Prediction: You’ll Make (at Least) One Mistake
This “prediction” is a bit tongue-in-cheek, but it’s also the one most likely to prove accurate. No investor can predict the future of the markets with certainty — and this includes financial professionals who’ve been trading stocks for decades. Making mistakes is simply part of the game when it comes to investing. If you can mentally prepare yourself for this truism, you stand a much better chance of doing well over the long haul.
Action: Stay the Course
The key to riding out your inevitable mistakes is to keep your portfolio in line with your investment objectives and risk tolerance at all times. Although you should anticipate making mistakes, trying to fix them by making more — like trying to time the market — is a recipe for disaster. Understand that you’re not going to bat 1.000. Just do all you can to ensure that your correct calls outnumber your wrong ones.
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This article is produced for informational purposes only and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions carefully.