The 2021 stock market predictions will start flowing from the pens of the financial media as the end of 2020 fades into the background. There can be no question that stocks are pricing in a very happy new year. Does that make it a bubble?
I think the better question is to understand what is holding up the market. The following tenants are why this market keeps going higher. If any one of them falls apart, then the market gets on shakier ground, and investors will start looking for an exit, whether in a nice, methodical path, or a bubble-bursting flee for the exits based upon how quickly the pillars crumble.
What’s Holding Up The Stock Market? 5 Keys to Stock Market Predictions
- Low Interest Rates – The irony is that the economy is very shaky, and everyone including the Fed knows it, that’s why interest rates are at zero. These low rates are a key to propping up the market.
- Coronavirus Improvement – Look, the U.S. can’t do any worse with Covid than it did in 2020. Between the federal government just ignoring the whole thing, and the states opening and closing randomly, the U.S. Covid response was about a bad as possible. Now, with a vaccine and some states getting their act together, there is an optimism that we can ride this out before it catches up with us. That’s a big maybe, but if it works then…
- Continuing Employment Growth – When half the economy becomes unemployed all at once, there is a lot of room for undoing the damage. Wait long enough, and optimists will call that “growth.” The trick here is that the economy is weak, and not everyone is getting their old job back, so eventually there has to be some real growth in the form of new jobs, or this weak pillar crumbles.
- Stimulus – Congress made my main prediction for the end of 2020 into a failure. I was sure that they would never agree on a stimulus, and that a divided Congress going into 2021 wouldn’t get stimulus either as Republicans blocked everything to avoid giving the new President any credit for anything good that happened. — But, Congress managed to pass a not-big-enough-but-good-enough-for-now stimulus right at the end of 2021. That holds off the economic demons for a few months. — If Congress decides to pump a little help to the states into the mix, we might just get out of this thing without a bubble.
- Business Investment – The new long-term structural defect in the U.S. stock market is the increasing the already overused stock buyback programs of many companies. Entire Fortune 500 companies essentially waste billions of dollars buying back stock, and then giving those shares away to executives and employees. A real return of value to investors comes in the form of dividends. Stock buybacks are the corporate coward way to return dividends because there is no blowback if you “cut” a stock buyback, versus you making a multi-year commitment when a company raises a dividend. — If companies invest in the future at zero interest, that is a great thing for the economy. If short-sighted executives do nothing other than try for their own bonuses via share buybacks, then that is not so great for the economy.
This article is for informational purposes only and is not a recommendation to buy or sell any securities. Consult your financial and tax professionals for advice specific to your situation. At the time of publication, the author did not own any shares in any of the companies mentioned, although that could change at any time without notice. The author is not a financial advisor and does not hold himself out to be one.