Published January 8, 2021
Despite a sharp plunge in stocks early in the year, 2020 was a solid year for the stock market and most assets as shown below. Only assets related to energy and real estate posted notably negative returns.
The strength in the stock market over the past couple of months bodes well for stocks in 2021. The first chart shows how the market performs after a -30% decline. The dark blue displays the return in the first year after the decline, with the light blue providing the second year return. Note that both years are positive and above the average return for stocks (which is 10-12% historically).
The second chart tells us that a solid performance in November/December leads to gains in January and the remainder of the year.
Bottom line: a solid year for stocks in 2020 and expectations for a continued good performance in 2021. We expect that our models will continue to do even better.
Stocks kicked of 2021 with a -1.5% selloff as investors appeared to take profits from the strong 2020 market returns. However, Tuesday saw stocks bouncing off of key moving averages reached in Monday’s decline. Fueling the rebound, the ISM survey of manufacturing activity hit its highest point in two years, a sign of strengthening economic activity. The S&P 500 added +0.7% in Tuesday’s trade with oil prices surging above $50/barrel on a Saudi plan to cut production. Wednesday delivered a sweep for the Democrats in the Georgia runoff elections, a result that bolstered the possibility of further economic stimulus from Congress. Economically-sensitive smallcap stocks rallied +4% on the news. Large-cap tech stocks took a hit on concerns a Democrat-led government might be more inclined to tighten restrictions on the group. Interest rates popped higher with the 10-year U.S. Treasury yield jumping above 1.0%. Tech stocks rebounded sharply Thursday with the Nasdaq leaping +2.6%. Semiconductor firm Micron (MU) issued a bullish earnings report to fuel the semi group. The Nasdaq continued its move higher in Friday’s session adding another +1.0% despite an employment report showing a loss of jobs in December.
Stocks kicked off the new year by adding to its weeks-long rally. The S&P 500 (SPY) rose +1.97% while the Nasdaq 100 (QQQ) ticked higher by +1.69%. The smallcap Russell 2000 (IWM) rebounded strongly from the prior week’s dip, its first in two months, with a +5.95% advance.
Warm wishes and until next week.