While 2021 will not quite feel the same as 2020, there are similar themes right now.
We are still dealing with COVID-19, much of the country is operating under the assumption that at some point later this year things will become more normal, and the stock market is still a strange place. Over the past 3 months, increases to record high numbers have been happening on a seemingly regular basis. However, the rollercoaster that began last year is unlikely to subside into a “normal” market in the near term. The question now is how long markets can keep this up considering the greater economic landscape and so many unknowns that seem to persist.
Optimism has grown to excessive levels since just before the presidential election. The velocity of gains tends to be higher during times when general optimism is high but inevitably the euphoria wears thin and the market either has a small downturn or at least a breather before moving higher again. There is always the unknown of how big a small, ordinary correction might be, but the average is somewhere around a 10% pullback before resuming the previous uptrend.
The danger of discussing these observations is that many people begin to imagine that they can accurately time them. While trends can be a very useful tool, gauging turning points can be extremely difficult. The chart above shows optimism and pessimism against a global stock/bond portfolio. Notice that when optimism gets high, invariably it eventually subsides and can even turn to pessimism. Over pessimism often precedes a new move higher. While measuring optimism and pessimism is useful, trading only on this data can be risky.
The one good thing about the recent market volatility, and negative moves in the market, is that it has reduced the amount of optimism in the stock market. This could lead to either a short-term market correction or simply remove the over-optimism in the market, which gives more potential to the market to continue to increase from that point.
There are many things to be optimistic about in 2021. Several vaccines have shown promising initial results and we need to find a way out of the COVID-19 pandemic. Monetary policy and fiscal policy have been supportive and have primed the market to grow as soon as relief on the health front takes significant hold. Lastly, when companies begin to see a way forward after the pandemic, they are likely to make significant plans for growth in their respective fields. All of these things bode well for the stock market and the economy in general.
There are also things to be cautious about. COVID-19 troubles persist. Social and political risks remain ever-present and dynamic. Until real progress is made, and more is known about vaccinations effectiveness, corporations are not going to want to make bold projections or hire extensive numbers of employees.
All of this causes some chicken and egg issues for the markets. Overall, the medium and long term are positive. Near term is a bit murky for the market as to whether it continues to advance or takes a breather from the remarkable comeback since the spring of 2020. 2021 is likely to continue the theme of dynamic changes that can excite or discourage at a rapid pace.
We learned in 2020 that patience and taking a longer view can be helpful to insulate from the emotional swings of our ever-changing environment. We certainly hope that your new year has begun well and that 2021 is a great year for us all.
Investment advisory services are offered through Trek Financial, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. Trek FG 21-12