Stock Prices & Looking Ahead to 2021

Victor Levinson Comments

During November and December, stock prices in the US and internationally made significant gains, which took the three primary US indexes to new all-time highs. Since the March 23, 2000 lows of 2,237 for the S&P 500, 18,591 for the Dow Industrials, and 6,860 for the NASDAQ Composite, the three indexes closed December at 3,756; 30,606; and 12,888, respectively. The percentage gains were 67.9%, 64.6%, and 87.9%, respectively.

As our regular readers are well aware, Park Piedmont’s usual response to changing stock prices is to take the position that no one really knows the reasons why, even after the fact. There are simply too many countervailing factors impacting the direction and extent of stock price changes. That said, given gains of this magnitude in a relatively short time frame (November and December), we thought it would be helpful to review some of the more likely current factors being discussed in the financial media (see also the more detailed discussion in PPA’s November Comments).

  • The discovery and anticipated widespread distribution and administration of vaccines against the coronavirus, even with new negatives like the apparent mutation of the initial virus and serious problems with the distribution of the vaccines.
  • Anticipation of an improving economy, and with it corporate profitability, in the not so distant future.
  • A small number of very large, technology-driven companies benefitting financially from current conditions, which in turn has driven their prices, and the NASDAQ index, to extremely high levels.
  • The extremely low interest rates offered to investors, which make bonds a less attractive option for positive future investment returns and stocks a more enticing alternative. (Though note this has been taking place since March 2020.)
  • Further, low interest rates typically act as a stimulant to the economy. These very low rates have made it easier for all bond issuers to borrow.
  • A newly elected Democratic president, working with a congressional Democratic majority in both the House and Senate, so that additional government help is expected (see 7B below).
  • A recent NY Times article adds some additional after-the-fact reasons: “Why the Markets Boomed in a Year of Abject Human Misery,” (NYT, 1/2/21, page B5). “The central, befuddling economic reality in the US at the close of 2020 is that everything is terrible in the world, while everything is wonderful in the financial markets….To better understand this strange mix of buoyant markets and economic despair, it is worth turning to the data,… some of which offer a coherent narrative about how the US arrived at this point, with lessons about how policy, markets and the economy intersect, and reveal the sharp disparity between the pandemic year’s have and have nots..” (A) incomes fell only 0.5% from March through November, because most jobs lost were low-paying jobs; (B) huge government assistance in the form of unemployment insurance and direct payment benefits, along with small business loans; (C) reduced spending, more saving, and the need to find places for this extra savings, some of which was the stock market, some housing… “Just because there may be some explanations for the 2020 gains does not mean these higher asset prices will hold… these patterns can reverse themselves; savings turn negative, inflation returns such that the Fed has to back off its easy money policy earlier than expected. But 2021 has yet to be written, and if 2020 teaches one thing it is that the story arc is more unpredictable than you would think.”