Looking back at 2020 and even 2019, how much more upside do the markets have? Market expectations for 2021 are likely to be characterized as a tale of two markets. In the first half of the year, we expect to see the markets absorb gains made so far as it is likely that the majority of good news has already been priced in. In order for the markets to rally significantly higher from here, they will need an additional catalyst to take it there. This could be something as bland and boring as ‘normalcy.’

Our current risk/volatility in the markets are most likely related to:

Since we are long-term investors, we are looking beyond the first half and into the second half of 2021 where we think the combination of very accommodative monetary policies as well as another fiscal stimulus will help the economy to accelerate much further. As the number of vaccines administered rises, we expect a second wave of pent-up demand to begin to get satisfied, particularly in the travel and leisure industries. The number of vaccinations is critically important here as it is likely to have a direct relationship to the increase in the economic growth of these sectors. And as the number of vaccinations grows, we’ll finally begin to see a return to some normalcy.

Other industries we would expect to benefit from growth in demand are those in the manufacturing supply chain as producers respond to sellers restocking their depleted inventories. (I for one have been waiting months for a new propeller for my boat.) The second wave of the recovery should benefit small-cap and privately owned companies. As their businesses pick up, they will bring back their workforce which in turn will reduce the unemployment rolls and the need for further stimulus.

As we go into the second half of 2021, there are a number of positive factors in place that we think should propel the markets higher, and particularly, companies left behind in the first wave of the recovery. Fiscal stimulus injected into the system, very low interest rates and pent-up consumer demand will continue to provide an opportunity for a price recovery in companies with lower stock valuations. In addition, we expect the international markets to benefit from synchronized global economic growth that we are likely to see in the second half of 2021.

I am predicting a positive year for the markets aided by widespread vaccine distribution thus bringing an end to the pandemic. Lower interest rates keeping the cost of capital for business low and pent-up demand will also contribute fuel for economic growth and higher corporate profits. My expectation is for the S&P 500 to end the year at 4,200 and the Dow at 35,000.

Brad Lyons, CFP®