quarterly market outlook, financial planning

5 Things to Watch in the First Quarter of 2021

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Have you found yourself officing in a room with a bunk bed? Do you realize you’re going to the store in your pajamas and never leaving your car? Does going to the movies mean going to the living room to turn on the TV? Quarantine changed the world almost overnight, and the adjustment is so pervasive in our everyday lives we hardly notice the details going by.

As we read the headlines and trendlines in holiday recovery mode, let’s look at five risk factors that might come into play this next quarter and affect financial planning in 2021. As we know, the markets respond to much more than dollars and cents, and wise investors look in several directions to see what might have an impact.

Vaccine Effectiveness

If you’ve spent any time on social media recently, you’ve probably seen your share of selfies of people holding up their bandaged arm to the camera – “I got vaccinated!” It’s becoming a common image, especially for those in the medical field, and it’s all-around good news economically.

A vaccinated person can be an interactive person, meaning they can safely go out to eat, fill the car with gas, go out for dessert after and maybe go shopping. (While still wearing their masks, for now, public health officials remind us!) All of these interactions are – penny by penny – putting wealth back into the economic engine. We have stimulus packages and we have tax help, but what we need the most is people out just plain doing things.

The thing to watch here is how quickly and how well the vaccine is being distributed, and how effective it is at driving the numbers down. It’s been tested and retested. Now the test is to see how it works in society and how many people venture back out with the band-aid on their arm.

Slow Recovery

The financial headlines from the last few months have been surprising sometimes – record gains in the Dow and S&P, as well as unemployment numbers that continue to be problematic but not as dire as some predicted at the start of the pandemic.

However, we have to remember we’re recovering from a cliff-drop early last year.

The economy rallied sharply in the third quarter after plummeting in the second. Shutdowns and social distancing hit the economy hard in the second quarter, and reopening allowed growth of 33.1%. Unfortunately, compounding means a 33% gain doesn’t wipe out a 31% loss. In other words, we’ve been going up quickly, but we went down pretty far to begin with.

And underneath this recovery may be problems that run deeper – underlying systemic damage. Employees who have been out of their service jobs for six months may find themselves jumping to a new field, leaving a hiring gap behind. Chronic loss of revenue means that local companies as iconic as the neighborhood Chuck E. Cheese are uncertain about keeping their doors open.

Uncertainty makes for a slow, unpredictable recovery in some sectors, while other business lines seem to remain untouched. The thing to watch here is whether the damage to the hiring base and small business will send shockwaves into the rest of the economy – and if so, just how bad those shockwaves will be.

Disputes with China

One of the few areas of unqualified bipartisan agreement in the U.S. is tension with China. Xi Jinping, the General Secretary of the Communist Party, has an iron grip on the leadership of the world’s most populous country. He is thoroughly China-focused and spends less energy on diplomacy than other Chinese leaders have.

China’s power over the supply and price of goods is a basic economic fact in the modern world. From raw materials to finished products, so many major supply chains make at least one stop there. China’s reticence to import and hold up the other side of a trade agreement is also well known, and Xi is even more aggressive about tipping the scales in their favor.

Disputes between the world’s two largest economies can move markets, and managing the relationship with China will be a major challenge for the Biden administration.

New Habits

We’ve already discussed the changes to our daily lives, from grocery pick-up to sharing a holiday dinner over Zoom. Everyday culture has been affected, which led to a change in habits and therefore in spending.

For example, think of social-distancing restrictions’ impact on the restaurant business. Curbside service took a while to streamline, meaning a loss in revenue every day while frustrated customers got used to it. People with more time on their hands have started to work on their cooking skills, and so have started buying more groceries, which means more money for the supermarket.

This all ends up with an economic flow that can favor goods over services. The revenue doesn’t disappear, but it does go in other directions as the habits of customers change drastically. Loss of profits means loss of jobs in one area and perhaps gains in another.

COVID-19 has reshaped our daily routines. When COVID is a much smaller risk, which habits will stick? Will remote work become so enduringly popular that the daily commute – along with the car sales and gas consumption that goes with it – almost disappears? How will new habits change the old world?

Investor Behavior

In 2020, the S&P moved more than 1% in 109 days, making it the most volatile year in a decade, and the fourth most volatile since 1996. Yet the year still finished strong despite expectations. Any time certainty appeared (or even seemed to), the market responded quickly. After the election, after the announcement of the vaccine – in the next day or two the markets bumped back up.

Investor behavior is a bit like driving on a crowded street. You might be totally focused on driving safely, but you never know how other folks are driving or how their decisions affect you! With the markets as volatile and unpredictable as they are, the reckless decisions of others can veer into your lane.

Technologies like Robin Hood and Acorns have brought new blood into the trading game. With inexperienced investors, especially bored ones in quarantine, that means a lot more people on the road, and many of them are driving far too casually.

The temptation now with some strong showings in the S&P and rosy valuations in the future is to go all-in on stocks. The markets survived – even thrived – in a pandemic, maybe now’s the time to bet the farm? This could end up being a classic case of recency bias, and those who bet big could lose big.

If 2020 taught us anything, it’s that circumstances change quickly and outcomes can be completely counter-intuitive. Diversification is key, and even more so when recovery is uneven and all the underlying damage to the economy hasn’t surfaced quite yet. Keep in mind, we also won’t have the government injecting stimulus checks into the economy forever.

Inform Yourself

In investing, risk is unavoidable, but we should have some ideas of what risks we’re facing. The smoke is still clearing from 2020, and the point is to not let what remains blind us. Inform yourself and meet with your advisor to get your bearings for financial planning in 2021.

Our Quarterly Market Outlook will give you a better idea of what to watch out for this year, watch it on-demand here.

This is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

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