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Without Additional Stimulus, Will There Be A Stock Market Crash In 2021?

The S&P 500 and Nasdaq Composite opened at record highs on Thursday, boosted by hope of Washington coming through on additional fiscal aid before the end of 2020. Congressional leaders have closed in on a $900 stimulus package which would include direct payments to individuals. A similar scenario in stock market was witnessed during November.

The latest round of U.S. fiscal stimulus talks comes as Covid-19 cases increase at a record pace. The U.S. is recording at least 215,729 additional Covid-19 cases each day, based on a seven-day average calculated by CNBC using Johns Hopkins University data. On Wednesday alone, more than 247,000 new infections were confirmed.

“We’re still close and we’re going to get there,” Senate Majority Leader Mitch McConnell, R-Ky., told reporters on Wednesday evening. Earlier in the day, he said: “We made major headway toward hammering out a targeted pandemic relief package that would be able to pass both chambers with bipartisan majorities.”

US stock market and ‘individual buyings’-A narrowing precedent

To answer what new stimulus would do, we need to look at what people did with their payments last time. The stimulus checks were and are intended to be used for helping families cope with the negative financial impact of the covid pandemic. The Congress and Senate were not intentionally expecting Americans to buy stocks to boost the Dow 30 index via a few technology stocks being over speculated.

The stock market in March – July was primarily supported by Quantitative Easing the Federal Reserve Bank gave to the Money Central Banks. The banks bought primarily stocks with the virtual credits issued from QE. This boosted stocks. Meanwhile, some employed Americans used their stimulus checks and their deferred loan payments for 3 months also to speculate in the stock market.

Only those who were unemployed, small business owners, and the poor used the stimulus to pay bills and to survive for a short time.

Owing to expected Quantitative Easing, the stock market is not reliant upon another round of employed Americans stimulus checks to be used to speculate the market.

Dow 30 and bear market signs; the tricky matrix

On one hand, individual stocks lost as much as 80–60% of their value from February level to now. But that was not showing up in the Dow 30 due to the way the formula is manipulated and changes to that index list of components. Here is the tricky part that Dow 30 is not indicating the actual condition of the majority of stocks in the stock market. At this time the Dow is hovering around a new all-time high. However, if one study the 30 stocks in that index, one would wonder how that is possible since only 4 stocks at the moment were at new highs, indicating upsurge in Dow 30.

The overall stock market which is 142 industries, 11 Sectors, and 3 Super Sectors started a bear cycle in 2018. A bear market exists in an economy that is receding, where most stocks are declining in value; for instance we have been witnessing the bear cycles amid COVID pandemic. Bear cycle market shows a lack of confidence; the prices fall by 20% and the period of declining prices is less than two months. This was invisible on the Dow 30 and other indexes because a few stocks in those indexes were highly speculated and with the averaging and weighting applied, the value of the indexes rose with those few moving up to new highs.

On the other hand, after studying all 5400+ stocks listed on the US exchanges, one finds the majority are predominantly sideways which is a form of a bear market called a Trading Range Market. If the Dow 30 has the top few stocks that speculatedly sell down due to those companies entering their bear business cycle, then it will (falsely) appear that a bear (recession) has begun.

Actually, the bear is ending as the trading ranges pattern out excessive pricing on the majority of stocks, and companies begin the recovery phase.

So, what this means is if the top companies sell down, the Dow 30 and other indexes might look as if a bear market or market crash has occurred. However, it is merely representing a handful of the 5400 stocks, not the entire market…If one study the stocks that are listed on the US exchanges, the index is way off the mark. The majority of stocks are still working in a trading range aka sideways price action and slowly recovering.

Stock market 2021: Stocks expected to keep climbing, Experts

The Dow 30 had been pushing up through individual buying from stimulus money. A number of strategists have so far offered their outlooks about where they think the S&P 500 is heading next year – and each one is expecting it to go up.

The new year is anticipated to usher in the distribution of a COVID-19 vaccine and a new presidential administration with a split Congress, alongside an extension of this year’s improving economic activity and low interest rates. Many analysts have cited this medley of events as fuel for another rise in equities. The S&P 500 is likely to post another double-digit percentage gain in 2021 as the distribution of COVID-19 vaccines underpins a lasting economic recovery, according to Oppenheimer chief investment strategist John Stoltzfus.

But of all these factors, the vaccine rollout is arguably the most important in determining the trajectory of the S&P 500 next year, Stoltzfus argued.

Investors are entering 2021 against a confluence of market-positive events, said JPMorgan strategists led by Dubravko Lakos-Bujas.

But even with widespread vaccine availability still months away, optimism over early vaccine efficacy data has already sparked a rally among stocks hardest-hit by the pandemic.

“The equity market is facing one of the best backdrops for sustained gains in years,” Lakos-Bujas said in a note. “After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, U.S. election uncertainty, etc.)… We expect a ‘market nirvana’ scenario for equities…”

Much of next year’s stock market rise is likely to come at the beginning of the year, as lingering uncertainties over vaccine distribution, the results of the Georgia senate race and additional monetary and fiscal stimulus start to dissipate.

“On average, stocks have historically gained about 65% during the first two years of a new bull market after an average 41% gain during year one,” LPL Financial strategist Ryan Detrick said. “Even with the S&P 500 roughly 60% above its March 23, 2020, lows, we see further potential upside in 2021.”

Future outlook: ‘A lot of (vaccine-stimulus) optimism is priced in already’

In terms of the economic recovery, Detrick believes economic activity will begin sustainably improving in mid-2021 after a vaccine gets distributed to the broader population, “fueling above-average GDP growth for the full year,” he said. He forecasts real GDP growth of between 4.0% and 4.5% in 2021.

Much of 2020’s run-up in the stock market came with multiples expansion, as prices escalated despite a drop in earnings, as companies dealt with fallout due to the coronavirus pandemic.

Next year, as the economy recovers and a vaccine allows for long-lasting re-openings, earnings growth will rebound and multiples will de-rate, according to Deutsche Bank strategist Binky Chadha.

November’s historic stock market rally, led by cyclical and value stocks in the energy, financials and industrials sectors, reflected broadening equity strength beyond just big tech and software shares (primarily Dow 30), another expert Darby said. “The much-maligned value and cyclical growth sectors are slowly making a comeback as inflation pressures begin to return. Inflationary pressures persist and “may be running higher, given rampant money-printing and a potential post-vaccine spike in demand,” noted BoA equity strategist. Federal Reserve Bank has reassured it will keep on buying bonds till economy’s recovery. Despite monetary expansionist approach within US, some are cautious against disinflationary possibility due to global imprints.

Even as investors ride a wave of vaccine-related optimism, potential negative catalysts abound. “The recovery is intact…but a lot of optimism is priced in already on vaccine/recovery…Vaccine execution risk, delayed fiscal stimulus and longer lockdowns are risks…”,  BoA equity strategist Savita Subramanian warned. Similarly, BMO Capital Markets strategist Brian Belski also tied vaccination-optimism with anticipation of another stimulus.


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