2020 was a remarkable year for the stock market. We saw the Dow tumble 35% in March — many days the decline happening so rapidly that trading on the stock exchange was halted to slow panicked selling. Then in a four month blink of an eye, the market rebounded in a record time. Comparatively, the stock market took five years to recover from the Dot Com crash and four years to recover from the Great Recession.[i]
The overnight recovery led some to wonder if we were truly out of the woods or if a double-dip was looming. However, the government has been steadfast in its commitment to support the American economy through COVID. In 2020, the U.S. government spent roughly $5 trillion dollars in the form of federal spending, tax cuts, loans, grants and subsidies in the wake of the coronavirus pandemic and economic crisis. [ii] Still in negotiation, the American Rescue Plan aims to budget another $1.9 trillion of aid in 2021, further fueling a hot economy and possibly adding inflationary pressure in later 2021. Additionally, new COVID cases are finally declining and vaccine dissemination is accelerating at a pace that has analysts predicting the economy will be nearly 100% reopen by the middle of the year.[iii] The Congressional Budget Office supported this prediction noting they expect economic expansion, as measured by real gross domestic product (GDP), to return to its pre-pandemic level in mid-2021 and to surpass its maximum sustainable level in early 2025.[iv] All of this has experts cautiously optimistic about the stock market in 2021.
Recently the stock market has been volatile due to wild swings in the price of GameStop, AMC theaters and Blackberry, to name a few securities. Several small amateur investors who follow the Reddit forum, r/WallStreetBets, outsmarted the multi-billion dollar hedge funds on Wall Street through what’s known as a short squeeze. It was a classic example of investors on one side (this time the hedge funds) borrowing the stock of companies they thought were overpriced, and waiting for the stock price to fall so they could repurchase it at a discount, pocketing a quick profit. The process of short-selling has an expiration date, or a date in which the hedge funds must return the borrowed shares. Therefore, when the stock they expected to fall in value suddenly rose in price, the short-sellers had to scramble to buy the stock back at the inflated price to limit their losses – the short squeeze. On the flip side of this transaction were the smaller investors who plotted together on Reddit to create artificial demand and drive up the prices of these beaten down stocks as revenge on Wall Street. This unusual twist of small amateur traders outsmarting big hedge funds to the tune of $5 billion in losses is what made headlines. In this movement, the stocks of GameStop, AMC Entertainment Holdings and Blackberry were up nearly 1,000%, collectively, only to decline in the week to follow. However, this is not investing, and it’s more reckless than gambling. Some have called this “gamifying” stock trading or “market manipulation.” The Securities and Exchange Commission is monitoring and evaluating what regulation should be implemented and regulation is likely to come.
Additionally, carmaker Tesla announced that the company bought $1.5 billion worth of Bitcoin, the cryptocurrency or global digital currency that allows for person-to-person payment without the use of a centralized bank. Tesla’s CEO, Elon Musk, has a strong following and he is credited for raising the price of Bitcoin from roughly $20,000 at the start of 2021 to $47,000 this week. The recent move highlights a growing trend in digital currency that has already taken a stronghold in Asian countries like China. However, despite Bitcoin’s surge in popularity, the industry is highly unregulated and many worry that the necessary cybersecurity to adequately protect the platform and its users is still lacking.
Regardless of the recent market distractors, the case for equity investments remains. The U.S. has a strong economy and 2021 will likely lead to better profits. Gains in categories like U.S. Value are also likely, as the sectors of healthcare and financials hit by COVID make recoveries in 2021. Further, the outlook for global growth is positive. The International Monetary Fund (IMF) praised the European Union’s economic stimulus measures, and in 2020, investments into European funds surged with inflows rising by 62%. This signaled that investors believe the Euro Zone might be the next sector for long-term growth.[v] At the same time, inflows of investment funds into diversified mutual funds and ETFs also saw its largest increase in years. Mutual funds can eliminate the need to time the market which means there is no good or bad time to start investing. A diversified investment strategy allows investors to minimize the volatility of individual stock portfolios, protecting investors in a market dip, but also capturing market gains globally as the economy recovers from COVID. If the recent market has caused you stress or concern, reach out to a Certified Financial Planner™ to ensure your investment strategy is appropriate for whatever lays ahead in 2021.
[i] Dow Jones market data
[ii] https://www.covidmoneytracker.org/
[iii] WisdomTree Siegel Weekly podcast
[iv] https://www.cbo.gov/publication/56965
[v] https://www.cnbc.com/2021/01/25/cash-flows-into-european-funds-surged-more-than-60percent-in-2020-new-data-shows.html