Predicting how the stock market is going to look in a year’s time is never a simple process, but 2021 is going to prove to be one of the most unusual years on record, because of how insane 2020 has been.
In the early part of the year we were hit with an absolutely unprecedented pandemic when Covid-19 started to spread and in addition to the untold amount of death and suffering it caused, the economy took quite a hit as well.
With many companies having to close their doors for the time being and an awful lot having to unfortunately shut down entirely, business has not exactly been booming during this period of lockdown and social distancing.
And as such, we’ve seen the economy starting to fail in a lot of countries with a number of them being positioned to face recession over the next few years. It’s been quite a devastating occurrence and many jobs have been lost because of it.
Naturally, this is going to have a ripple effect on the stock market too. While some stocks have remained relatively stable with some even continuing to grow during this period, it’s clear that companies who are more likely to be affected have been discounted.
Those which were financially fragile, prone to failure amidst the disruption of international value chains and less resilient to the restrictions brought about by the necessity of social distancing all dropped quite rapidly as the pandemic began to take hold.
While there have been other crises which have had similar consequences for specific companies, this one is quite different because of the mass uncertainty that surrounds our future with Covid-19.
As of June 2020, the virus is still getting worse on a global scale and it remains unclear for how long this will continue. Certain countries are improving while others are not, the United States being one which is seeing cases rise on a daily basis.
The handling of the virus by the American government has been extremely inefficient and so the future of the stock market in American is really quite up in the air right now. The virus could start to slow down before the year is out and everything could be back to normal by 2021.
Or it could go on for quite some time yet and continue to have an impact on our economy and on the stock market for years to come. So the level to which we can predict how the stock market will look in 2021 is a bit limited, but there are some things to consider:
One possibility is that the stock market will see something which is referred to as V-shaped recovery, which means that although it has declined in the last few months, it will bounce back by the fourth quarter and take us smoothly into 2021.
This is predicted by some, in spite of the downturn and the fact that the coronavirus doesn’t seem to be slowing, because the economic consequences of the virus could potentially open up certain other market opportunities.
The gap between junk and investment grade-corporate credit is expected to shrink which means that those who have invested in higher-yield bonds and shares will have the opportunity to invest in larger corporate credit.
This could work towards filling the void that’s been created by the declining shares of a large number of different companies. In addition, many investors who saw significant loss due to their investments in more fragile companies will now pump money into riskier assets to try and regain some of their momentum.
On top of that, we should also consider the fact that although there are certain parallels between this and the other economic downturns, most notably The Great Depression of the early 20th Century, we can’t expect this to play out in the same fashion.
In a way, this does contribute to the difficulty in predicting what the market will look like next year but it can also allow us to inject a little bit of optimism into our expectations because the difference this year has to do with security.
For one thing, the United States now has the Federal Reserve playing a role by ensuring that major financial markets are protected during major instances of government debt and pumping money into them to ensure they don’t collapse.
We can see this in action in the American stock markets right now and while it hasn’t helped the businesses who are suffering because they are unsuited to survival during a pandemic, it appears to have been beneficial to the stock market overall and has helped it recover to some degree.
And many other countries are following the same pattern with central banks intervening to ensure that the blow to the stock markets is not as severe as it could be and thus lessening the fears of investors and making them less likely to back out.
So the reality of the situation is that it is really impossible to know how this will play out as we get closer and closer to 2021. What we do know for sure, is that the world is a different place to what it was the last time we saw a market crash of this magnitude.
It is entirely possible that the virus will still be with us by this time next year, that the affected business will still have shares that have completely plummeted, but the market itself will have stabilized because of the aid of institutions such as the federal reserve as well as the altered approach of investors.
If you want to invest in 2021, you should keep this in mind, while also keeping in mind that there are certain stocks which will be more reliable. Decide for yourself whether it’s more worth it to aim for dividend-yielding stocks or bonds.
And try to focus on sustainable industries, ones which shouldn’t be harmed should social distancing and the lack of international trade continue as the year goes by. Consider software companies and financial industries over retail and commodities.
The key to success is the same as it’s always been. Do your research, listen to the experts and keep as up to date as possible on which stocks are doing well and which ones are failing and hopefully you should still maintain some strong investments.
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SPY shares rose $0.22 (+0.07%) in after-hours trading Monday. Year-to-date, SPY has declined -4.43%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: StockNews Staff
The StockNews Staff is led by a team of investment experts including CEO, Steve Reitmeister and trading legend Adam Mesh. The goal of our commentary is to provide you with valuable insights to make more successful investment decisions. More…