Markets aim to begin 2021 similar to how 2020 ended
January 04, 2021
Markets are poised to begin 2021 similar to how 2020 ended, with a broad market rally. Last week saw a strong close to the year, with the S&P 500® Index touching its 33rd record close for 2020. The primary drivers of market strength continue to be optimism surrounding the vaccines and the benefits from the latest round of fiscal stimulus. The S&P 500 gained 68% from the March low after losing more than one-third of its value in less than a month, finishing the year with a return of 18.4%, the sixth-best performance in the past 20 years. Notable winners including the NASDAQ (+44.9%), the Russell 1000 Growth Index (+39.5%) and MSCI Emerging Market Index (+18.7%).
Sentiment indicators reinforce the enthusiasm of investors, with the American Association of Individual Investors showing bearishness at multi-year lows. A Bank of America survey of fund managers showed the lowest level of cash in nearly eight years. The strong sentiment reading also reflects elevated valuations, with the S&P 500 at 22x forward earnings and the NASDAQ at 28x earnings. IPO activity also reflected the optimism, with $368 billion more than 50% above the previous high.
Betting odds and polls have steadily shifted towards Democrats winning the Georgia runoff election and control of the Senate. Coinciding with that shift has been a steadily improving equity market, suggesting that investors are betting on incremental stimulus, but not enough of a mandate to drive transformational tax or regulatory reform. This is consistent with the “glass half-full” mindset of investors over the past two months.
The vaccine rollout has lagged initial estimates, with just 4.2 million doses administered as of Saturday, below the 20 million year-end goal. Doctor Fauci, while acknowledging disappointment, noted that the pace has accelerated and could be fully on track within a week.
Georgia is set to hold a runoff election on Tuesday that will determine control of the Senate. The Democrats hold modest leads in polls and early voting per RealClearPolitics, while betting market Predictit gives Republicans a slight lead in odds of retaining power. Even if the Democrats gain control, the margin will be remarkably thin, and analysts are skeptical over whether a meaningful shift in tax or regulatory policy is possible. Democrat control could, however, spark another round of coronavirus stimulus and potentially an infrastructure package.
What to Watch
Economic data is plentiful this week, with PMI data on Monday and Wednesday, ISM data Tuesday, durable goods on Wednesday and the monthly payroll report on Friday.
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