Stocks fell 35% in 2020. Then they sharply made a comeback, far exceeding the previous year’s market highs. That should make you feel good, except…the pandemic is still here. Businesses are still shut down. Our economy will likely not be what it once was in the pre-pandemic world… Are we being too optimistic in the market? Will there be another stock market crash in 2021?
Want to hear my prediction?
Well like it or not, here it comes! 😉
The Stock Market Crash in 2020
I wrote a post back in early March as I watched the stock market crash unfold right before my very eyes. It was insane. On some days, the market dropped 7% or 8%! The Dow dropped thousands of dollars at a time! People were just fleeing the market and putting their investments into safer havens (mainly, that meant cash!).
It was scary.
It honestly felt like the 2008 crash all over again.
- The uncertainty,
- the distrust in the market,
- Heck, the sheer panic as people pulled out their entire life savings…
For the most part however, the extreme dip in the market was short-lived.
By the end of March, Congress passed a stimulus bill that eased the tensions and put us back on the road to recovery. The markets started rising again and we were soon out of the deep recession and back into growth mode.
Reasons For The 2020 Stock Market Crash
Now that we’re on the other side of the 2020 stock market crash, let’s peel back what happened. (And from this, evaluate our current state and estimate the odds of another stock market crash in 2021.)
Back in 2020, there were a ton of things going on:
- A presidential election
- The pandemic
- An over-valued market that was due for a correction
- Fears of a recession (which means investors were incredibly sensitive to market movements)
It was a perfect storm – that point of inflection where everything bad was seemingly happening at once.
- And because of this, people no longer saw the stock market as a sure-thing,
- so they pulled their money out…
- which meant the market went down,
- which lead many more to distrust their investments and pulled their money out too!
The vicious cycle continued until the government pulled out every antidote and wildcard that they had, which finally calmed the heavy losses and prompted growth in the stock market again.
Where We Are Today – Stable or Teetering with Frailty?
Remember February and March in 2020? It seemed like every time I looked at the Dow, it was either up $1,000 or down $1,000 (or more). There just weren’t those quiet days like we were used to just months before. The volatility in the market was CRAZY! Want proof? Check out the CBOE volatility index below.
According to Investopedia, the CBOE volatility index is:
“…a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX).”
In other words, it’s a measure of the uncertainty in the market.
As you can see, the volatility index numbers started spiking in mid-February. By mid-March, the stock market was down severely. And, they were beyond just correction status (ie. a 10% reduction). The market was headed for an all-out recession.
Today, you can see things have calmed down and are continuing toward the calm levels of 2019 when the stock market was rising quickly, and with low volatility.
While some may believe the market is overvalued at the moment, we’re nowhere near the fear level of early 2020 when the market values sunk like a rock.
Overall, I’d call the current market a stable one.
Stock Market Crash in 2021 – Fact or Fiction?
So what’s going to happen next? Are we in for another stock market crash in 2021?
First of all, nobody can predict the future with 100% accuracy. Nobody knew the world was going to get slammed with a pandemic in 2020. It could happen again, who knows? But, we’ve got to give predictions based on what we know today and what’s likely tomorrow.
So here we go.
To try to paint the picture for the future, we’ve got to understand the present and then assess the go-forward momentum.
So what’s the current condition of the U.S. economy? What’s going on in our world today?
- The political divide is still evident, but not as stark or violent as it was just months ago
- The coronavirus numbers are falling and vaccines are being delivered around the globe
- Another round of stimulus payments is hitting peoples’ bank accounts
- Businesses are beginning to open their doors again
- And, people are no-doubt ready to start spending their money on entertainment again
All in all, just like the stock market itself, the current state of the United States (and the world) is stabilizing.
I’ve had this feeling for months now — that the stock market is about to erupt like it did after World War II.
- People have been afraid
- They’ve been cooped up
- They’ve been saving their dollars just in case something horrible happens
- And now, the drapes are opening up, the sun is shining in, and people are going to start spending again!
Businesses will begin to thrive, more jobs will open up, and more spending will ensue. All signs point to a booming stock market.
Many market experts agree…
Here’s an excerpt from Grow Acorns:
“A growing economy bodes well for corporate earnings, which analysts, on average, expect to grow by 21% in 2021, according to data from S&P Capital IQ. Some analysts are more bullish than that. “We potentially could see S&P 500 earnings growth of 25% in 2021, boosted by cost-efficiencies achieved during the pandemic,” say analysts at LPL Financial.”
Morgan Stanley had this to say:
“In sum, we see both compelling opportunities in the stock market and the potential for a solid year of returns, as would be consistent with the second year of a bull market in equities, but we do expect significantly more volatility along the way.”
While the message from Morgan Stanley was more cautious and expected volatility to increase, the overall message was still a positive one.
Motley Fool’s Take – A Potentially Ominous One
A recent title caught my eye a few days ago by the Motley Fool, “3 Reasons a Stock Market Correction is Very Likely in 2021“.
I won’t give away the entire post here. If you want to read the article, I recommend you follow the link and absorb the full piece.
As a summary though, they actually state that it’s quite likely that the stock market earns between 10%-19.9%. However, there are some warning signs that could signal a stock market correction, or even an extreme dive like we saw in 2020.
I agree with their reasons, but I more so agree with their conclusion:
“While this is probably not the news you want to hear after navigating your way through one of the steepest crashes in stock market history one year ago, it’s also a heads-up that opportunity may be on the horizon.”
In other words, if you missed the extreme sale on stock prices in 2020, there may be another one coming. Don’t miss it this time.
Sure, the market could dip and be a little scary again, but there’s also a great likelihood that the market will bounce back just like it did a year ago. So if you see it take a dive, don’t run for the hills! Invest instead! That’s what I’ll be doing!
Back in March of 2020, I was pouring as much money into the stock market as I could. After all, it was a 35% off sale! Stock market sales like that only come around every decade or so!
In total, I was able to get an additional $50,000 invested. Just a few months later, that total is now up to $70,000 or so (not a bad quick gain!). While I’m not as bullish on the growth now vs. then, I’m not moving that money any time soon. I believe it has some more growing to do.
What Am I Doing With My New Investment Dollars
I am still working and have no debt, so we obviously have a surplus of income each month. What are we doing with it?
Here’s the breakdown of our investing in 2021:
- $500 a month into our Health Savings Account (tax free money!)
- 15% of my income into our Roth 401k (through my employer) – invested heavily into index funds similar to the S&P 500
- $1,350 a month from rent stays in our Rental House savings account – to be used to re-shingle the roof and to update the kitchen to produce higher future rents! Beyond that, excess funds will be used for another rental purchase!
- Additional excess funds are for fun stuff!
As you can see, we’re still putting money into the stock market. While I don’t think the market will continue to soar like it has since March 2020, I am still bullish on the economy and the overall stock market in 2021.
Plus, I should probably note that we never deviate from putting at least 15% into the stock market.
- If the market is shooting off like a rocket, I’m investing 15%.
- If it’s tanking and there’s doom and gloom everywhere, I’m still investing at least 15%.
I’m a firm believer in dollar cost averaging and the power of consistent investing!
Are You Bullish? Or Do You Predict a Stock Market Crash in 2021?
What’s your take on the stock market in 2021? Do you think it will soar like most of the experts? Or do you predict we’ll be seeing a stock market crash in 2021?
I’d love to hear your take below! Leave a comment and let’s have a dialogue!
AUTHOR Derek Sall
Derek has a Bachelor's degree in Finance and a Master's in Business. As a finance manager in the corporate world, he regularly identified and solved problems at the C-suite level. Today, Derek isn't interested in helping big companies. Instead, he's helping individuals win financially--one email, one article, one person at a time.