by It’s impossible to accurately predict what the stock market do in 2021. However, here are several reasons why you should have an optimistic stock market outlook for 2021.
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Flood of Money should increase GDP
In late December 27, 2020, President Trump signed a $900 billion stimulus bill.
Yes you read that correctly. 900. BILLION. DOLLARS.
The bill includes, just to name a few, the following beneficiaries:
- Each adult with an income up to $75,000 a year will receive $600
- Eligible families will receive an additional $600 per child
- The unemployed will receive an extra $300 per week until March 14
The bill also includes:
- $82 billion for education
- $54 billion for K-12
- $23 billion for colleges and universities
- $285 billion for additional loans to small businesses
- $70 billion for public health measures
- $10 billion for the child care industry
And the list goes on, until the final tally reaches $900 billion.
The full 5600 page document can be found here:
I think this spending will be good for the economy, in other words, good for the stock market.
Here’s the definition of Gross Domestic Product (GDP):
GDP is the total of consumer spending on goods, business investment, government spending, and net exports.
We know for sure that there is an increase in government spending based on the passage of the $900 billion bill.
That government spending goes directly to multiple beneficiaries as I mentioned before: citizens, families, schools, hospitals, etc.
When consumers get money, what do you think they do with it? They spend it! They spend it on food, transportation, clothing, electronics, etc. Consumer spending will increase.
My guess is that the stimulus, compared to 2020, will increase consumer spending, government spending, and even business investment, the sum of which will vastly eclipse any potential decrease in net exports, resulting in a net increase in GDP.
Let’s look at some history. Remember the 2009 recession? The stimulus package from that era was believed to increase GDP and get the economy back on track.
According to Obama’s chief economic advisor, the US economy started to turn around after the passage of Obama’s $787 billion stimulus package. The stimulus plan also boosted GDP by 2.3 percentage points in the second quarter of 2009.
Source: CNN Money
Still not convinced?
The stock market does not mirror GDP precisely but there is a bit of correlation.
According to the Federal Reserve Bank of St. Louis (FRED) we can see the small positive correlation between the Willshire 5000 index and GDP. The dip in GDP in 2020 is partnered with a dip in the WIllshire 5000 index.
So it would be reasonable to believe that an increase in GDP would be paired with an increase in the stock market index. Intuitively, it makes sense. When people are spending, businesses can record greater profits which generally drives stock prices up.
Vaccine Rollout
It’s January 2021 and we’re entering one of the worst stretches of the virus. It’s spreading rapidly throughout the country, and is expected to increase as holiday gatherings and lockdown fatigue result in more cases.
So why should your stock market outlook for 2021 be so optimistic?
One word: Vaccines.
Yes, covid cases are spreading but we can kinda sorta see a light at the end of the tunnel.
It was not unusual for it to take decade(s) for a vaccine to be developed.
It took over a decade to develop the Hepatitis B vaccine, and nearly 45 years to develop an Ebola vaccine.
The covid vaccines (yes there are multiple) were developed at breakneck speed, and rolled out in less than a year.
Yes cases are rising, but vaccine rollouts are rising too. It has not yet hit its full stride, but distribution will steadily increase.
Eventually (I hope), a vast majority of the world will be vaccinated by the end of 2021. When that happens, life will be (more) normal. People will dine out at restaurants. Attend sporting events. Hop on an airplane.
I don’t want to jinx anything of course… but a return to normal life appears to be inevitable, all thanks to medical science’s amazing contribution to vaccines. Knock on wood!
Travel Recovery
I think I speak for everyone when I say: I want to travel again!
Oh remember how carefree we used to be? We used to be able to travel halfway across the world and enjoy pasta in Italy or sushi in Japan the very next day. The good ol’ days…
I anticipate that there will be moderate to high pent up travel demand.
Travel industry site Skift forecasts a full travel spending recovery to pre-covid levels by 2024.
Yes, recovery could be slow because people don’t tend to carry over their discretionary travel budget. If they skip their 2 vacations in 2020, they probably won’t “make it up” by taking 4 vacations in 2021. But the important thing is that recovery IS anticipated. It will happen! <Fingers crossed>
Discretionary Spending Recovery
All the things you were going to spend money on in 2020…
- Dining out
- Travelling
- Clothes
- Vehicles
When we return to “normal” will you be increasing your spending? Will you be dining out more? Will you purchase that trip to Bali? How about spending on anniversaries, weddings, nightclubs, and sporting events?
I imagine that you, like me and many others, are saying YES.
Increased spending increases GDP. The stock market outlook for 2021 looks promising.
Presidential and Congressional Certainty
Businesses react to uncertainty.
Just think about it.
If you weren’t sure your restaurant would survive new taxes or new policies, would you still invest in a 2000 sq ft extension?
It doesn’t matter who’s in the White House. Democrat of Republican. Pro or anti-business policies.
As the new administration takes office, the taxes and policies will become more clear. Once businesses understand them, they can plan their investments accordingly. Increased business investment increases GDP, which of course is generally good for the stock market.
History
History has shown time and again that you can’t beat the stock market. Timing the stock market is futile.
Based on history, the average S&P 500 annual return is 10-11% from 1926 to 2018 according to Investopedia.
Even in 2020, during the worst pandemic in 100 years, the stock market rose 18.4%! It’s hard not to be optimistic about that!
Summing Up
The stock market outlook for 2021 looks promising for several reasons.
- The flood of money from the government stimulus should increase GDP
- Increased GDP is generally good for the stock market
- Vaccines have been developed and are being distributed
- Travel and Discretionary spending should increase
- Presidential and Congressional appointments should lead to greater business certainty and investment
- History is on your side
If 2021 is a good year for stocks: Great!
If 2021 is a bad year for stocks: Even better! As you dollar cost average your investments, you’ll pick up stocks on the cheap! As long as you’re a long term investor, your portfolio will have time to recover.
Stay the course, my friends.
But if you want to enjoy your portfolio it’s more important than ever to stay safe and stop the spread.
Continue to wear a mask and keep your social distance!
Let me know your thoughts below.
How do you think the stock market will perform in 2021? Are you optimistic or pessimistic?
