Stock markets in 2021?
Lets take a quick look at the current state of the US & UK Stock Markets and examine in which direction these two major stock exchanges might be heading in the next 12 months. To break it down further lets focus on two key indexes on these exchanges, S&P 500 which measures the stock performance of 500 largest firms on US stock exchanges, and FTSE 100 which follows stock performance of 100 largest firms on London Stock Exchange.
Most of us will admit that 2020 was particularly hard and challenging. Corona Virus managed to cast a shadow of fear and economic uncertainty which then quickly reverberated through all the major financial markets. Back in late February of 2020 when the World realised the magnitude of the problem which Corona might represent, markets reacted by shedding up to 40% of their values within matter of days. S&P dropped from Feb 2020 all time high 3380 down to 2304 points in March, and in the same period the FTSE 100 dropped from 7400 down to 4990 points. This market slide didn’t come as a surprise considering the economic uncertainty at the time stirred up by the pandemic.
US - S&P 500 since the start of COVID 19 Pandemic
UK - FTSE 100 since the start of COVID 19 Pandemic
Positive signs after Covid -
It certainly hasn't been all doom and gloom for stocks post Covid, since the lows of March 2020 the markets have rallied with S&P 500 springing back to its pre corona values within weeks, in fact the S&P has gone on a record breaking run and recorded its highest ever price of 3934 points in February this year! This is a sign that investor confidence was quick to return after all the Covid 19 negativity. Governments of major nations responded by implementing various Social and Economic steps which reassured people and businesses that they will on the whole be ok even during the lockdown.
Funds were were made available to struggling business and the unemployment rates have been keep in check especially in the UK. Another important factor has been the Vaccination program which seems to have been a success so far, this is all good news for the markets. In the US the markets have also been helped by the surge of confidence in Tech Stocks such as Tesla and Apple which have propelled the S&P charge.
At the same time UK markets are yet to reach their pre Corona levels despite a bounce back after the initial crash in March 2020. We have to take in to an account that UK stock market has been largely influenced by the uncertainty regarding the Brexit process in recent years, especially as revenues from the UK and Europe account for around 45% of companies total revenues in the FTSE 100. UK markets have been a tricky one to predict and it feels like investors have neglected the UK markets for too long. However a closer look at FTSE 100 would tell you that it is trading at around 15 times companies expected profits (a key valuation measurement) against 24 times for American S&P500.
According to a study last month by Royal London Asset Management, UK oil and has companies traded at 12.6 times expected earning while the same sector in the US was 23.1 times, similar trend was to be seen in other stocks such as basic materials and even tech. This might indicate that the UK markets now look cheap and there is value to be found and I believe the FTSE 100 could go to 7300 by the end of this year.
What to expect in the next 12 months -
Going back to US markets the S&P 500 is still very strong and the Tech is still leading the way and we don’t see this bull slowing down yet. Despite some analysts suggesting that US stocks in general are overvalued (and some certainly are) there are a number of bullish indications which tell us that the peak has not yet been reached. Election of Joe Biden over Donald Trump should provide assurance and comfort to the markets, additionally Fed Reserve is expected to keep interest rates low until 2024 and that should help to keep money pumped into stocks.
We should also consider the fact that political leadership in Washington is split down the middle and history tells us that political gridlock is great for stocks. Another reason to carry on being optimistic are the Tech stocks. Yes they’ve had a great run for a number of years now, but some of the major companies such as Facebook and Microsoft look relatively cheap even at today’s prices, a look at price-to-sales ratio for five largest Tech stocks from 20 years ago to today would suggest that there is still enough value locked in these stocks.
After all the shocks and bad news of 2020 we believe 2021 will be a good year for Stocks, both in US and UK, and financial investments in general. The worst of COVID pandemic is almost behind us and the vaccination program has so far been a success. Public confidence and interest in Technology and economy in general is positive and its not going away any time soon.
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