Market Outlook for 2021: What is Wall Street Expecting?

Wednesday, January 6, 2021 3:47 PM | Neal Farmer

2020 brought about as volatile a market, and economy, as we've seen in recent years. This was mostly, but not entirely caused by Covid-19.

With the New Year finally here, Wall Street is so far cautiously optimistic for 2021 with vaccines already being distributed and new stimulus measures taking effect and more seeming likely. However, caution remains key after all that happened in 2020 and uncertainty remains about how much coronavirus will effect the economy in 2021.

Vaccines!

Perhaps the biggest reason for optimism from markets in 2021 is the distribution of coronavirus vaccines. Vaccine shots are already being administered in many countries from a number of efforts such as Pfizer (PFE) and BioNTech (BNTX), Moderna (MRNA), and AstraZeneca (AZN) and the University of Oxford. Long-term confidence is high given that a vaccine has already been approved for use and doses are already being given in high numbers even if it will still take a significant amount of time to vaccinate everyone.

However, analysts  expect a rough start to the New Year before the effects of the vaccine and stimulus can really be seen. Many countries are currently battling covid outbreaks and even more will face this struggle as new cases rise with holiday travel not helping matters. The new mutation first discovered in the United Kingdom only worsens matters with early evidence showing the strand to be even more contagious. Researchers are confident that their vaccines will be effective against the new strain but should that not be the case, the recovery time table will be even more bleak than currently expected.

Stimulus

The newly passed $900 billion stimulus package has Wall Street more bullish on 2021. Many analysts expect cyclical stocks to outperform coming out of quarantine. The covid-19 relief bill should help many stay afloat with the $600 checks and $300 increase in per week unemployment benefits helping keep people afloat even as new coronavirus cases continue to rise. These numbers represent only half of what was provided by the CARES Act in the spring of 2020 but should still make a significant impact.

Additionally, new stimulus packages are more likely given the pending results of the Georgia run-off elections that look headed toward a Democratic sweep. This will give Democrats control of the Senate with Vice President-elect Kamala Harris having the tie-breaking vote. Should the Senate be 50-50 with a Democratic controlled government, further spending is likely but markets tend to favor a mixed government as opposed to either party having complete control. Early trading following Election Day in Georgia showed investors reallocating assets from tech into cyclical stocks as they expected increased infrastructure spending and other boosts to the non-tech parts of the economy.

Cyclical Stocks

A common theme on Wall Street is analysts expecting a huge recovery in return to work stocks as the worst of coronavirus is hopefully behind us or ending very soon. Analysts at UBS expect cyclical and small sectors to outperform after being hit particularly hard by lockdown measures and still hold superior value to tech and other stocks. Investors will be awaiting a potential bubble to pop from big-tech as well as electric vehicle stocks as many now have incredibly high valuations. Market sentiment continues to drive prices higher, but it is hard to know how long that will last. The remote-work stocks that outperformed in response to covid seem most likely to come back down to earth or at least underperform the market as things return to a new "normal".

As previously mentioned, the effects of early outbreaks in the year will likely lead to more remote work trades but as the year goes and vaccines are distributed, the return to work stocks should benefit the most. Banks, airlines, and retailers will look to recover the most as these sectors have lagged behind many other industries with quarantine measures still in place.

Wrapping Up

Overall, Wall Street is expecting a very strong 2021 after an extremely volatile 2020. The U.S. economy has only recovered half of the jobs lost due to the pandemic but a reopening economy and stimulus look to speed the recovery process. A recent drop in labor force participation and a higher ratio of permanent job losses casts a shadow on the better thanexpected 6.7% unemployment rate. An overall consensus appears to be for a slow recovery early in the year as countries fight outbreaks while vaccines give optimism for strong growth mid to late in 2021.

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