Stock markets shrugged off coronavirus in 2020 and could do even better next year
Everybody agrees 2020 was a rotten year, and most people therefore assume stock markets had a rotten year too, but bizarrely, they didn’t.
Despite the global crash, shares have done surprisingly well. Investors should even end the year richer than they started it, unless they did something daft, like sell during the market low in March.
If you are struggling to believe markets had a good year, I’ve got some numbers that should change your mind.
They may also make you feel more confident about the outlook for 2021.
Growth down, shares
The global economy is on course to contract by 4.4% this year, according to the IMF, yet stock markets refused to follow suit. Global shares returned a punchy 11.19% in the year to 30 November, according to the MSCI World Index.
Coronavirus may have first struck in China, with Wuhan locked down in February, but the country’s stock market fought back to grow a mighty 36.69%.
As I write this, more than 2,500 people are dying of coronavirus every single day in the US. Surely Wall Street is paying the price? Not so. The MSCI USA Index is up 16.56%.
So why are stock markets buzzing while nations are locking down and the global economy is on its knees? The quick answer is the US Federal Reserve, which spared us a global market meltdown with its trillion-dollar bailout in March.
The European Central Bank, Bank of England, Bank of Japan, People's Bank of China and others followed suit by unleashing their own monetary bazookas, too.
Not every global stock market has done well. The Europe MSCI Europe index climbed a meagre 1.15%, while the UK fell a thumping 14.55%. It seems like Brexit has inflicted more harm than Covid-19.
Higher returns, lower risks
Some investors may be uncomfortable with the idea that their portfolios are propped up by unprecedented sums of fiscal and monetary stimulus. At the same time, I reckon this makes stock markets a one-way bet.
Nobody in their right mind would leave large sums of money in cash right now, getting a near-zero return. Returns on bonds are almost as bad, with 10-year US Treasuries yielding less than 1% at time of writing.
Stock markets continue to offer scope for much higher returns, while the potential downside is limited, as central bankers prop up asset prices.
Politicians look set to keep the stimulus coming, while the Fed is ruling out a hike in interest rates until at least 2023.
Things might just get better
Stock markets do not reflect how investors see the global economy today, but six to nine months into the future. The record-breaking November rally, which saw the Dow grow 11.8%, suggests investors expect 2021 to be brighter as Covid-19 vaccination programmes kick in.
They are working on the assumption that lockdowns end, economies open up, and people cast off their face masks and splurge. That’s certainly what I plan to do, I don't know about you.
The IMF is projecting GDP growth of 5.2% next year. If the world does explode out of the blocks, 2021 could be a great one for investors as sentiment rebounds. Welcome to the roaring twenties!
Challenges remain, though. The pandemic isn't beaten yet and we could be in for a tough winter. Vaccination programmes may take months to roll out. Job losses will rise sharply.
It will be a bumpy road to recovery. The key is to look beyond short-term trends, and focus on the long-term. History shows that despite their ups and downs, equities remain the best way to build long-term wealth.
That's where I keep the majority of my retirement savings. Nothing this year has changed my thinking. Instead, it has confirmed it.
China set to lead the charge
Right now, experts are flagging up Asian emerging markets to perform best in 2021, led by a resurgent China.
The region will get a further boost from the continued slide in the US dollar, which is falling due to Fed largesse and political uncertainty. This makes it cheaper for emerging economies to service their debt, which is denominated in dollars.
Japan is also expected to perform well next year, as Chinese demand spills over. The big question is whether the US tech titans can continue their astonishing surge, which has left the country with four trillion-dollar companies: Amazon, Apple, Microsoft and Google-owner Alphabet.
Big tech has benefited from the pandemic, as demand soared among locked down customers, and it would take a brave investor to bet against it today. However, I would caution against increasing your exposure, you may already have plenty following tech’s runaway success.
I would also caution against electric car maker Tesla, which is hugely expensive after rising more than 800% from its March low of $70, to $627 at time of writing.
I might buy Tesla on a dip, but not at today's price.
Brexit still casts a shadow
The New Year is the time to look forward rather than backwards. In truth, investors should be always be doing that, and resist the temptation to chase past performance.
Talking of which, the UK has underperformed global stock markets since the EU referendum in 2016, in a trend that continued this year, too.
Some analysts have been tipping Britain to play catch-up once Brexit is sorted. As I write this, nobody has any idea how talks will pan out, or anything else.
I'm tempted to make the UK a big contrarian call for next year. However, given the mess it has got itself into, I'm holding back.
I suspect the Brexit saga will be running long after the pandemic has started to recede from our memories.
That aside, 2021 looks brighter for investors. 2020 wasn’t so bad, either. Who knew?
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.