This means that we are finally in the home stretch of 2020 - a tumultuous and turmoil-filled year. However, the year is certainly ending with significant optimism due to the positive news and updates that seemingly pour in daily on the Covid vaccine front. Both morale and investor sentiment for an economic rebound in 2021 has certainly spurred markets forward. Since November, the Dow, S&P, and Nasdaq have gained between 12-13%. The Dow witnessed its best month since January 1987, and the S&P and Nasdaq saw their best months since April.
However, the performance of the small-cap Russell 2000 has been most encouraging about the broader market’s rally. Since November, the Russell has risen over 19%, and outperformed the other major indices by nearly 6-7%.
This is especially encouraging because it shows that investors believe that an economic recovery will be robust and comprehensive in 2021. Because the Russel consists of so many small-cap cyclical stocks dependent on the recovery of the broader economy, it bodes well for the long-term economic sentiment.
Be wary though that there is still a multitude of short-term headwinds. COVID will not disappear before 2021 starts and is most likely with us for the duration. The virus headlines are as bad as ever and striking fear into politicians and investors alike. Re-imposed shutdowns also do not bode well for the economy. Combine that with the premature ending of key economic support measures and a seemingly endless gridlock in stimulus talks, and you have an inevitable stutter in the economic recovery. Or worse- a double-dip recession.
In fact, according to Blackrock, these restrictions will cause a mild GDP contraction in Q1 2021. This contraction however could be even worse than predicted if there is no stimulus package agreed upon before the end of the year. If these negotiations continue dragging on further and further into 2021, a risk of permanent economic scarring rises considerably as well.
If November showed us anything though, it showed us that there is finally a light at the end of the tunnel. The news of the UK’s approval of Pfizer and BioNTech’s vaccine has encouraged increased investment activity. The perception of these developments provide comfort that the virus can be contained. This short-term market volatility may be worth monitoring for mid-term and long-term opportunities to bet on the 2021 rebound in economic activity.
Keep in mind that markets are emotional beings and can be swayed by short-term news and sentiment. However, in the broader scheme of things, these are forward-looking instruments and investment vehicles that look 6-12 months down the road. Remember how sharp and swift the rally was after the crashes in March. Since markets bottomed on March 23rd this is how the ETFs tracking the indices have performed: Russell 2000 (IWM) up 85.11%. Nasdaq (QQQ) up 78.82%. Dow Jones (DIA) up 65.90%. S&P 500 (SPY) up 62.54%. Markets long-term rise and are focused on the future rather than the present.