2020 has been a historical year from a variety of perspectives, and the stock market is no exception. The year started off with a strong rally in many high-growth tech stocks, and expectations that global growth was starting to pick up after decelerating since 2018 due to the trade war…
As a result, the S&P 500 was trending higher, making new, all-time highs. However, this pretty picture was wrecked by the coronavirus which caused a 35% crash in stock prices in a little more than a month.
In turn, the Federal Reserve unleashed massive amounts of stimulus to support financial markets by cutting interest rates to zero and starting a bunch of programs to inject liquidity into various markets including corporate bonds. It doubled-down on its dovish stance by stating that interest rates will remain at zero until 2022 and adjusting its inflation framework to make clear to investors that interest rates won’t increase until inflation meaningfully climbs above 2%. Previously, the Fed would begin to tighten in anticipation of interest rates hitting 2%.
There was similar aggression on the fiscal front. Due to the economic effects of the shutdown, Republicans and Democrats came together to pass a wide array of bills to boost unemployment checks, provide payroll support to businesses, and investments in health research. In total, this year’s deficit is expected to be $3.1 trillion due to a combination of lower tax revenue and increased expenditures.
However, this has undoubtedly had positive impacts on the economy as measures like consumer spending and housing have bounced back to levels higher than 2019. Other parts of the economy remain off levels from a year-ago but continue to show improvement on a month to month basis.
These factors also led to a V-shaped rebound in stock prices with the S&P 500 making new highs in August. Over the last two months, the market’s momentum has stalled, and we’ve traded in a sideways range between 3,200 and 3,500.
Most likely, this is a healthy consolidation for the market. Overbought conditions are being relieved to set up the market for its next move higher. For investors who want to take advantage of this bull market and the recent dip, they should consider adding three ETFs with promising prospects into 2021: ARK Genomic Revolution Multi-Sector ETF (ARKG), Invesco Dynamic Leisure and Entertainment ETF (PEJ), and the Materials Select Sector SPDR ETF (XLB).
Reasons to Expect a Q4 Rally
All of these ETFs offer an intriguing upside. However, another important point is the overall trend in the general market, and investors should expect that stock prices will trend higher in the fourth quarter and through 2021. The best way to track the general market is through the SPDR S&P 500 ETF Trust (SPY).
The main factor is we had a major capitulation event in March 2020. Due to this and the economic uncertainty, there is a massive amount of money on the sidelines, specifically institutional funds. As this money is deployed, it will drive the market higher.
We’ve seen previous major capitulatory events – March 2009, May 2012, and February 2016 – from those lows, prices kept moving higher and were strong in the following year. It’s also not a coincidence that the Fed was also aggressively dovish during those periods like it is now.
In addition to the Fed, fiscal stimulus is also likely to be deployed if the economy starts to show signs of weakness. This also another reason to be supportive of the “buy the dip” trade. The polls also show a 65% chance that Joe Biden wins the Presidency and a 60% chance that Democrats win the Senate. This would increase the size and chances of stimulus being passed.
Another major catalyst for stock prices is that…
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