The last year has proven to have had exceptional volatility. COVID-19 has caused one of the fastest and deepest recessions in history. In the spring, employment was at depression levels. Fortunately, many sectors of the economy have at least partially recovered and the large technology companies have experienced record profits and market value. However, the last year has not been kind to value/high dividend paying stocks which are more economically sensitive to the shutdown. Value stocks are down about 7% over the last year. In particular, the energy index is down approximately 48% and financial stocks are down about 13%. Foreign stocks are pretty much flat for the year and U.S. small companies have dropped around 4%. The Dow Jones Industrial index is up 4.3%.
Going forward there are strong headwinds and tailwinds. The primary headwinds are election uncertainty and the ongoing COVID shutdown causing pressure on employment and corporate earnings. The market never likes a contested election and some uncertainty after November 3rd is probably priced into the market. However, if people question the ability of our country to democratically elect a government, then significant market damage could be done. Also, if we do not obtain a vaccine by this spring, then the COVID risk will probably cause a market decline. Higher taxes would also put some pressure on stocks, but the effect would probably be short term (unless the increases are extreme.)
The tailwinds for the market are: very low bond yields, the almost 5 trillion dollars sitting in savings and money market accounts (earning almost no interest), and corporate earnings surprises by a rapid reopening economy. Some investors use the acronym TINA (There Are No Alternatives) when talking about stocks. The strength of the headwinds and tailwinds could lead to near term volatility. If the headwinds dissipate in the months ahead, then the market would significantly benefit.