The big surprise of 2021: a booming economy and a warm stock market

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An abnormally bad year brought abnormally high gains for the stock market in 2020. However, a return to normalcy could be disappointing.

Dow Jones Industrial Average

advanced 5.8% in 2020 to 30,179, after gaining 0.4% last week.

S&P 500

rose 15% this year to 3709, after rising 1.3% this week – even if

adze

(ticker: TSLA), which rose 731% in 2020, will not join the index until Monday.

Nasdaq Composite

jumped 42% in 2020 to 12,756, after gaining 3.1% per week. Even

Russell 2000

entered the act, rising by 18% in 2020.

These gains came despite a lot of bad news that hung over the year: the coronavirus that shut down the economy and killed over 300,000; the continued attention of politics, which has made every tick a referendum on elections; and the death of George Floyd and the protests that followed. It is a reminder that the market has no emotions, does not respond to the clues that individuals may have and appreciates what could happen over what happened.

Next year promises to be less traumatic. In the last week itself, people in the United States have begun to be vaccinated against coronavirus, with some expecting 100 million Americans to be shot by the end of the first quarter. Returning to everyday life to something more like normal should provide an incredible boost to the economy, one that ultimately helps the US get rid of the slow-growing malaise in which it was stuck both under Barack Obama. as well as Donald Trump, when the US -product growth had problems reaching 3% in a given year.

In fact, the biggest mistake investors could make is to look at the last decade and extrapolate to the future. The latest recession was caused by a financial crisis that left banks with hurt balance sheets, reduced risk appetites and stagnant growth, due to a lack of a major fiscal stimulus and a Federal Reserve too worried about inflation that never came.

This time, billions of dollars in tax incentives were distributed immediately – and there may be more on the way. The Fed also seems to realize the mistake it made in the 2008 financial crisis and promised not to tighten monetary policy until 2023.

Most importantly, the current recession is not due to too much risk-taking, but rather to a virus that forced it to stop. That means the recovery should be faster and stronger than it started in 2009, says Christopher Harvey, US equities strategist

Fargo fountains

Securities. “It’s not a J, K, XYZ or any other letter you want to throw away in recovery,” he says. “It’s a V-shaped recovery.”

This is certainly not the point of view of consensus. Economists predict that the US economy will grow by 4% in 2021, faster than usual from 2010 to 2019, but not enough to undo the damage caused by the coronavirus recession by 2022 or 2023. There is a good chance economic growth. be much faster than that, says Michael Darda, chief economist at MKM Partners, who estimates that GDP will expand by 4.5% to 6.5% next year, while inflation will average 2 , 5% to 3.5%.

“The second half of the year should be very strong, because the launch of the vaccine and the intensification of efforts to reopen the therapeutic ramp,” he says. “The accumulation of billions of liquid assets in the household sector will be ‘degraded’, as households spend on many services (leisure and hospitality, etc.) that they could not spend in 2020.”

But, as we have heard so many times in 2020, the economy is not the market. It’s not that growth isn’t good for stocks – it’s absolutely absolute. A booming economy means that next year’s S&P 500 earnings could increase by 15% to 20%, says Darda. But strong growth could increase Treasury yields, and this would put pressure on market valuations, especially those of high-priced growth stocks in the technology, communications services and consumer sectors. Investors use Treasury yields as a risk-free rate and the higher they are, the more valuations for growth stocks can decrease. “The market will be flat until the simple figures increase / decrease, because the multiple contract has higher discount rates,” says Darda.

Harvey of Wells Fargo agrees. He predicts that in 2021 investors will come out of high-flying technology and become cheaper and more economically sensitive stocks. But technology is a huge part – 28% – of the S&P 500.

Apple

Only (AAPL) represents almost 7% of the index and

Microsoft

(MSFT), over 5%. If these stocks should have escaped water or – jumped! – even if they fall, the index may have trouble making significant progress.

“If they don’t work, it will have a high share of the index,” says Harvey, who has a 2021 end-of-year target of 3850 on the S&P 500.

His advice: Buy stocks with high “Covid beta” – the most sensitive to the rise and fall of the market, based on good or bad news about coronavirus – because they will benefit the most as life returns to normal. They include

Darden Restaurant

(DRI), which gained 3.1% in the last week, despite offering a declining revenue outlook,

MGM Resorts International

(MGM) and

Whirlpool

(WHR).

Of course, there will be reason to doubt that the rotation is real. In the last week, the Nasdaq defeated the Dow by more than two percentage points. Remember, this is normal too.

Read more Trader: The dogs in the Dow stock collection strategy did not work this year. It could be in 2021.

Write to Ben Levisohn to [email protected]