Itâ€™s hard to imagine a more dramatic roller-coaster ride for investors than the year 2020. The Covid-19 whipsaw felt like the Great Recession and the Dot Com Bubble wrapped together and compressed into 12 months. That experience should provide a lesson for investors in 2021:
Predicting the future is a risky game.
â€œThe S&P 500 dropped over 33% in March, we just went through a contested presidential election, and weâ€™re still in the midst of a global pandemic that is only getting worse. And yet the S&P 500 has been hitting all-time highs. No one could have foreseen that, and no one knows what 2021 will bring,â€ says Kansas-based financial planner Desmond Henry. â€œIf 2020 has proved anything, itâ€™s that the market is impossible to predict, so thatâ€™s why I donâ€™t try.â€œ
If anything, 2020 should teach investors that well-established principles, like investing for the long-term with a low-cost diversified portfolio and only checking your investment balance occasionally, are the best advice.
â€œI advise my clients not to get caught up in the latest hot stocks, sectors, or investment trends, Henry says.
If you panicked when the market dipped in March and sold your investments, youâ€™d have missed out on a full recoveryâ€”including 60% growth since Marchâ€™s nadir. Thatâ€™s why Henry recommends clients â€œkeep a well-diversified portfolio to weather whatever the markets bring next rather than trying to predict whatâ€™s going to happen next.â€
Still, itâ€™s impossible to ignore the trends that may impact investors in 2021. Here are the top ten trends that may affect the stock market and your investments in the new year.
1. The Biden Impact
January will be dominated by news of the incoming Biden administration. Plenty has been written about President-elect Joe Bidenâ€™s plan to raise taxes on the wealthy and its potential impact on stocks. But the market reacted favorably to Bidenâ€™s apparent victory on election night and continued to rally as the election results became clearer in the following days.
While Wall Street initially seemed to hope for a blue wave, the marketâ€™s recent performance seems to show it also likes gridlock, meaning the markets will probably react favorably regardless of the outcomes of Georgiaâ€™s run-off U.S. Senate races.
2. Beginning of the End of Covid-19
The approval and gradual distribution of Covid-19 vaccines will be a major obsession in early and mid 2021. Will the vaccines work as advertised? Will they be rapidly distributed around the country and around the world?
There will be inevitable hiccups. But as better weather returns to the U.S., normalcy could begin to gradually return. At the same time, markets will be watching for Congress to pass additional stimulus to provide a lifeline for small businesses and consumers until vaccines really start to slow the spread of the virus.
How quickly the pandemic fades will have enormous macro economic impacts, and these will hit every single investment sector. Some will be more obvious than others, so they each merits their own discussion.
3. Covid-19 Vaccine to Boost Pharmaceutical Stocks
If the pharmaceutical industry manages to get Covid-19 under control during 2021, it will be a triumph for science. Public companies involved in the effort will be handsomely rewarded.
There will be less obvious winners, too. Just one example: Distributing the vaccine will require an enormous logistics effort. Some vaccines require well-below-freezing transport, for example, so firms that sell cooling technology stand to benefit.
4. Pent-up Demand for Travel Stocks
Plenty of other sectors are set to jump if the world starts returning to normal in 2021. Pent-up demand for travel could drive a gold rush for long-punished airline stocks, hotels and even cruise lines.
And all that increased economic activity will do wonders for hard-hit tourist cities around the country and around the world, too. How much? Seth Carpenter, chief U.S. economist at UBS, predicted in November that early vaccine successes could mean near-zero Covid cases in the U.S. before summer, which would add 1 to 1.25% to U.S. GDP.
5. Hunger for Restaurant Stocks
Fast casual restaurant chains are set to benefit from the potential return to normality. Many have limped along with take-out ordersâ€”but on the day Pfizer announced its vaccine had 90% efficacy in Phase 3 trialsl, there was a widespread rally among chain restaurants, representing almost every kind of cuisine.
6. Beware the Work from Home Stocks
On the other hand, plenty of firms that saw surprising gains in 2020 might be imperiled by a potential return to normalcy after Covid-19. We also got a taste of this with Pfizerâ€™s announced breakthrough vaccine trial. Work-from-home darling Zoom (ZM) lost nearly 20% at one point.
Food delivery services fell sharply, too, as did similar stocks.
Zoom isnâ€™t going anywhere, and neither is the work-from-home crowd. But that November day should be a cautionary tale that growth in this sector is probably entering a new phase.
7. Be Mindful of the Rotation
New investing phases are normal. In the stock market, they are called â€œrotations.â€ Money runs after gains in certain sectors until a rally there becomes exhausted, and then money runs to other sectors.
Itâ€™s not uncommon for a surge in high-risk / high-reward tech investment to be followed by a rush to boring utility stocks. Itâ€™s likely that investors will rotate into different sectors in 2021.
8. Slowing Tech Stocks
Analysts have long predicted a slowdown in tech stocks, which had an excellent year in 2020â€”so well that the B word for bubble was frequently bandied about in market coverage.
The long bull market for tech stocks is bound to end eventually. Factors that could be in play in 2021 include the potential for messy antitrust litigation against Google (GOOG) and other tech giants. Itâ€™s unclear how a Biden administration will handle the Trump administrationâ€™s lawsuit against Google. But there seems little doubt that state attorneys general will continue to pursue litigation against giant tech firms.
9. FAANG Stocks Are Long in the Tooth
The slowing tech and rotation trends both lead us to the FAANG stocks and their outsized market impact over recent years. FAANG is a Wall Street nickname for Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (now called Alphabet)â€”athough Microsoft (MSFT) is sometimes substituted for Netflix to make FAAMG.
However you name it, this basket of tech giants represent about 20% of the value of the S&P 500. More important, during 2020 they represented a giant portion of the gains seen in the S&P 500.
By the end of November, for example, the S&P 500 was up about 13% for the year. But Microsoft and Google were up 36% each, Facebook was up 40%, Netflix was up 55%, Apple was up 67% and Amazon was over 70%.
Itâ€™s a good bet that this story could change in 2021. What remains to be seen is if the FAANG names can continue to rise like rocket ships. If they donâ€™t, will investors look to rotate their money into other tech stocks or into other sectors? Or will stagnated FAANG growth drag down the broader market?
News in any direction could have large implications for your investment portfolio.
10. Donâ€™t Overreact to the News, Be Ready for the Unexpected
Predictions are hard, but itâ€™s easy to predict something unexpected will happen in 2021. Thatâ€™s why the most important advice is to avoid the temptation to over-focus on the short term.
â€œI believe in focusing on your goals and working back from there versus reacting,â€ says certified financial planner (CFP) Bobbi Rebell, host of the Financial Grownup podcast. â€œSo no change driven by outside factors,â€ like the events you might hear about in the news.
The new year also offers investors a chance to take stock of how they handled the unexpected events of the past 12 months and consider making changes, she says.
â€œDo you have enough savings that are liquid for things likeâ€¦a pandemic?â€ says Rebell. If not, it might be time to bulk up your emergency savings. And if you found yourself overly stressed or panic selling over the past year, you may want to adjust your investment strategies to include more fixed-income investments in the new year.
In a world where uncertainty is more a feature than a bug, itâ€™s important to be prepared for market highs and lows, even within the span of the same year. While one can hope nothing as dramatic as a pandemic hits in 2021, Henry expects investors should be ready for another roller-coaster ride next year.
â€œOne reality that I think investors need to become more comfortable with is increased volatility in their investment portfolios. While 2020 is an outlier in terms of the wild ups and downs, volatility is something every investor is going to have to get used to,â€ he says.
More from Forbes Advisor
With a weekly newsletter looking back at local history.