NEW YORK -- For equities, 2020 was an unprecedented year featuring a deadly pandemic, a brutal recession and wild market moves.
Heading into 2021, market strategists saw upswing potential ahead on expectations for a vaccine-assisted defeat of COVID-19 as well as a broadening recovery, warning of possible volatility as uncertainties remain.
"The words I most associate with the 2020 equities market are that it was a year of 'extreme extremes' in that COVID-19 hovered over the global economy and global markets in ways that affected every aspect of business and social activity," Quincy Krosby, chief market strategist at Prudential Financial, told Xinhua in a recent email interview, reflecting on the past year.
"Extreme global monetary and fiscal responses, particularly from the Federal Reserve," and extreme efforts and a rapid response from the biotech community as they began developing vaccines in historical and record time, have "allowed markets to look forward to a 2021 global economic recovery," she said.
Indeed, COVID-19 almost dominated the narrative in 2020. The global economy paused virtually overnight and countries across the world grappled with the fight against the virus.
Equities crashed between mid-February and late March in a pattern that many referred to as an event-driven bear market. The downside was sharp, sudden and scary that saw the S&P 500 slump nearly 34 percent in only 23 trading sessions, also its fastest-ever dip into a bear market.
Markets managed to bottom out and make a turnaround in the backdrop of swift and aggressive actions by central banks to cut rates and establish lending programs, and enormous fiscal government support.
In addition, the recent progress in COVID-19 vaccines and global vaccine rollouts have lent support as investors priced in the lasting economic recovery that vaccines would confer.
Despite all the ups and downs, the world's major equity markets posted encouraging results for the past year.
The S&P 500 closed 2020 with a 16.3-percent gain, while the MSCI World Index was up more than 13 percent for the year, led by surging technology and e-commerce stocks.
Emerging markets stocks have done even better, fueled by China's first-in, first-out recovery from the COVID-19 crisis. The iShares MSCI China ETF notched a yearly hike of 28 percent.
This pattern suggested that, with the coronavirus contained, markets would benefit, said Krosby.
"As the latest COVID-19 wave has been hitting Europe and the US, markets are reacting to the prospects of a stronger economy in 2021 as the rollout of vaccines continues globally," she noted.
Betting on sustained economic recovery
Many market strategists and investment professionals remain optimistic for the year ahead.
The year 2021 should bring stabilization and a reset for a number of disruptions experienced last year, with front-loaded market momentum and an economic recovery to follow, according to J.P. Morgan's 2021 Global Market Outlook.
J.P. Morgan Global Research analysts believe that recovery, reflation and rotation against the backdrop of accommodative monetary and fiscal support will set the backdrop for key market and economic calls for 2021.
From an investment perspective, 2021 could see a welcome change or a return to normal, according to Morgan Stanley's 2021 Investor Strategy Outlook released in December.
"Though challenges remain, we think this global recovery is sustainable, synchronous and supported by policy, following much of the 'normal' post-recession playbook," said Andrew Sheets, chief cross-asset strategist for Morgan Stanley Research.
Morgan Stanley's strategists expect 25 percent to 30 percent earnings growth across major equities markets and significant declines in key corporate leverage factors.
According to Krosby's analysis, a vaccine rollout is expected to be a key drive for the 2021 US market.
"If successful in terms of reaching herd immunity which requires 70-80 percent of Americans vaccinated, the 'breadth thrust' of the market should continue to include those sectors most closely associated with consumer engagement," said Krosby.
"With a weaker US dollar and a stronger Chinese economy, emerging markets should continue to do well," she added.
Key themes to watch
While easy monetary policy and rock-bottom interest rates will encourage investors to continue favoring equities in the new year, experts cautioned that volatility is likely to continue as uncertainty persists.
Possible challenges in COVID-19 vaccines, the trajectory of the economic recovery, the timing of another US stimulus package and the political landscape in Washington are among the key themes for the year ahead, according to analysts.
"Virus case counts are rising in much of the world and mass vaccine distribution will be no small feat, given the logistical complexities. Plus, the economy is not yet completely out of the woods," said Andrew Goldberg, global head of market strategy and advice of J.P. Morgan Wealth Management.
Larry Benedict, CEO and founder of The Opportunistic Trader, a US market research firm, told Xinhua that for the fate of additional US fiscal stimulus, "US positioning and reaction to what we would consider a new world," and "whether or not the vaccine is as effective as we think it is," among others, are major catalysts.
"Heading into 2021, the first hurdle will be Jan. 5 runoff elections in Georgia," Benedict said.
"The surprise will be full control for the Democrats of all branches of government. If that happens, the (US) market will receive a minimum of a 20 percent hiccup," he said.
Georgia's runoffs will determine which party has control of the US Senate, which currently leans Republican.
Wall Street normally prefers a divided government and a certain amount of gridlock as investors believe that a split scenario could avoid dramatic policy change.
"After that hurdle, the market will look to see how the vaccine is taking hold and whether or not the world and especially the US can get back to the 'new normal,'" Benedict said, noting "it may not go as smooth as everybody thinks."
While "there is no way investors can predict where the market is headed," it is crucial for them to separate emotions and political beliefs from the investment decision-making process, said Mitch Zacks, CEO at Zacks Investment Management.