Jason Gunkel, CFP®, CFA, CAP®, Chief Investment Officer
January 8, 2021
The stock market is starting the new year much like it ended 2020, reaching new highs on multiple days. Despite all of the turmoil and uncertainty caused by the COVID-19 virus and the election, the stock market ended up having a very good year in 2020. The S&P 500 Index ended the year up over 18% after being down at one point close to -30%.
However, as we discussed many times last year, much dispersion in returns existed among the various parts of the market. The “value” side of the S&P 500 index (including many financial and energy companies) was only up about 1% while the “growth” side of the index (particularly technology stocks) was up over 33%! The top five technology stocks in Facebook, Apple, Amazon, Netflix, and Google averaged a return of over 50% in 2020!
While the stock market has experienced a “V” shaped recovery, with a swift downturn followed by a swift recovery, the final shape of the economic recovery is still uncertain. The U.S. economy grew 7.4% in the third quarter, which was the single largest quarter of growth in history, according to the Bureau of Economic Analysis. The economy has now recovered about 2/3 of the amount it fell during the pandemic.
The unemployment rate continues to fall (about 6.4% at the writing of this article) but at a slower rate. Industries such as oil and gas, leisure and hospitality, and transportation continue to have much higher than average unemployment rates, according to Statista.
The additional stimulus measures passed by the U.S. Congress and the COVID-19 vaccines could help the economy recover to its pre-pandemic level by the end of 2021. This would fall short of a “V” shape, but still a relatively quick recovery.
A second stimulus package was passed by Congress in late December that provided a tailwind for the market. It included an additional $900 billion for COVID-19 relief, on top of the over $2 trillion that was provided by the initial CARES Act.
The most recent stimulus package included the extension of additional unemployment benefits and direct payments to individuals up to $600 per taxpayer and child. For a complete summary of the relief bill, please see our previous article.
The stock market once again proved its resiliency by continuing to climb after the results of the Senate seat runoff elections in Georgia and chaos at the U.S. Capitol. The victories by the two Democratic candidates in Georgia gave them a very slim majority in the Senate to go along with their majority in the House. However, the small majorities will likely push policymaking closer to the center with the most ambitious Democratic proposals unlikely to succeed.
President-elect Joe Biden has proposed potential tax increases to corporations and high-earning individuals. However, there is not total agreement in the Democratic party on many of the tax ideas, and they will likely have to be scaled back to be able to pass in the Senate. But we have mentioned in previous articles that the stock market can still do very well through tax increases.
Following the election results, bullish investors seemed to focus on the likelihood that a Democratic-led government will boost stimulus spending, which will help the market and economic recovery continue.