Despite a year of steep job losses, industry downturns, and economic pain, the stock market ended 2020 at record highs. This comes as a surprise as cases around the world have been surging and businesses have been forced to either reduce capacity or shut down once again. The S&P 500 finished 2020 up around 16 percent, while the Dow Jones Industrial Average and the Nasdaq ended the year up more than 7.25 percent and 43.6 percent, respectively.
The revival of Wall Street has undoubtedly been influenced by the optimism surrounding the approval of multiple COVID-19 vaccines and by the passing of the largest federal government stimulus bill in history. Investor confidence is high as people around the world believe that the economy will bounce back quickly as we enter 2021. Investors have chosen to disregard the overrun hospitals, battered small businesses, and a job crisis worse than that of the Great Recession.
Michael Farr, president of Farr, Miller & Washington, stated, “That a pandemic-induced economic shutdown of epic proportion has been digested with stocks ending the year 15 percent higher is mind-blowing… 2020 has been stunning.” It is clear that investors are focused solely on the future of the markets and the economy.
There are many factors that support the sustained confidence that is currently present. First, Goldman Sachs has forecasted a growth of almost 5.9 percent for 2021. If this comes to fruition this will be the best yearly increase since 1984. Second, according to the Federal Reserve, the unemployment rate is expected to decrease by around 5 percent. This means that several million people could potentially return to work during the year.
Corporate earnings are also expected to increase starting in the third quarter of 2021. According to Ryan Detrick of LPL Financial, “Stocks are a forward-looking mechanism. They don’t care about what is happening right now or what happened in the past. So much of why stocks have done so well this year is looking ahead to a really significant economic bounce in 2021 as the economy opens up due to the vaccines.”
Even though we were in a bear market in March as investors began dumping their shares, this was the shortest downturn in the history of the market. Since the stock market bottomed out, it has risen almost 68%. This record rebound shows the confidence that investors have towards both the stock market and the economy as a whole as we enter 2021.