Is the stock market about to catch a breather after a blockbuster 2020? That’s the million-dollar question heading into year-end. Stocks have been on a roll, with major indices flirting with record highs. Since Donald Trump assumed the reigns of powers in 2017, the S&P 500 has rallied by more than 60%.
Stock Market rally
The stock market has mostly benefited from friendly policies formulated by the FED and the Trump Administration. Landmark corporate tax cuts led to a surge in profits and buybacks. The cutting of interest rates also had a hand in fuelling the bullish run. The rally has also coincided with a challenging macro environment fuelled by the COVID-19 pandemic.
The pandemic has taken a significant toll on the economy. The slowdown is already arousing concern in the investment community, with investors turning to holding cash instead of seeking investments in the markets. Overvaluation concerns are another tailwind that continues to bombard investor’s sentiments.
A CNBC poll of 100 Chief Investment officers, portfolio managers, and CNBC contributors indicate that most money managers expect the stock market to come under pressure. Two-thirds of the polled persons affirmed that the new administration’s first four years could be far worse than Trump’s term when it comes to stock returns.
Wall Street experts are especially wary of the impact of the Biden administration reversing Trump’s tax cut. A reversal of the tax cut could result in the wiping out of earnings at a time when most equities are flirting with record highs. The new administration has also promised to raise capital gains rates for high earners.
Amid the growing concerns, there is growing optimism that some sectors could outperform under the new administration. Some of the sectors that could benefit from friendly policies include consumer discretionary, industrials, and financials. In contrast, utilities consumer staples and energy could struggle a big deal.
Stock Market 2021 Outlook
While some strategists expect a major pullback in 2021, most expect the market to finish higher. The CNBC survey indicates that money managers expect the S&P 500 to rally to record highs of $4,000. The DOW, which has already wiped out the COVID-19 pandemic losses, is expected to rise by about 16% to $35,000.
January has always proved to be the month that sets the pace on how stocks are likely to behave as the year progresses. Ahead of the New Year, investors are already wary of the fact that the bull run could slowly be coming to an end. History has always shown that the S&P 500 tends to rally and close higher, 82% of the time, on the market moving higher in the first five days of the year.
The outcome of the two senate races in Georgia could also have an impact on the stock market. No matter the outcome, the race is expected to trigger market reaction. Strategists are wary of Democrats winning the two seats as the party could have the power to pass policies such as tax hikes, which are not friendly to the stock market.