The stock market enters 2021 with favorable outlooks. Vaccines should help prevent the spread of COVID-19; S&P 500 earnings are expected to keep rebounding; the Federal Reserve has assured markets that it will not raise interest rates and there have already been some new rounds of fiscal stimulus signed into law. Please remember that the stock market is forward-looking and many prominent analysts feel that it has already priced in a stronger economy and the pausing of the coronavirus pandemic. That raises the risk that any disappointment in the recovery will rattle investors, especially with the P/E (price-to-earnings) ratio of the S&P 500 at a high level. This has caused some leading market followers to argue that the stock market is overvalued.
Most analysts are optimistic for 2021. Barron’s recently surveyed 10 market strategists and chief investment officers at large banks and money-management firms on the outlook for 2021. Averaging their year-end S&P 500 forecasts, which range from 3800 to 4400, the group expects the index to rise some 9% next year, to about 4040. Add a dividend yield of around 2% and U.S. stocks could return a total of 10% to 11%. Their panel predicts the U.S. economy will grow by 5% in 2021, its fastest rate since 1984.
Predicting short term changes in the equity markets is still near impossible. Equities are primarily for long term investors. With interest rates at or near zero, investors who need returns need to consider equities. With 10-year Treasuries yielding around 1%, equities become even more noticeable on an investor’s choice list. Equity markets will continue to move up and down. Even if your time horizons are long, you could see some short-term downward movements in your portfolios. For 2021, caution is still the principal notion for investors. Our goal is to make sure your investing plan is centered on your personal goals and timelines.