When it comes to the stock market, there is always something that makes stock prices move a certain way to an investor’s benefit or dismay. It is important to understand what makes stock prices move the way they do and have a precursor to knowing what they will do in the future so you can buy at the right time. Being informed after all is what makes a good investor.
For many investors, the pandemic was a very confusing time. Most smart investors did not panic sell when the market briefly crashed in March of 2020, and as a result if they kept buying in while the market was down, they would have made off really well. Others who did panic sell may have underestimated the overall potential of the economy and missed out on a deal of the lifetime.
The pandemic focused heavily on growth tech stocks, the ones that could really thrive in an economy that was shut down for several months, and was not dependent on human interaction. In fact some companies that played a role in facilitating socially distance behaviors were ones that really took off for many investors. Some examples include Zoom, Peloton, and Amazon.
Now that we appear to have the pandemic mostly behind us, the stock market is changing course. Stocks that were left for dead such as airlines and retail have started to come flying back into the picture along with other stocks like cruise lines and banks. Tech stocks have now kind of stalled, but there are still many investors who believe these are long term haulers in a digital economy moving forward.
Its hard to always know clearly how the market is going to behave moving forward particularly in the short term. Investors always have their own thesis but more importantly base their decisions on their own predetermined timeline. More patient investors will ignore the highs and lows and just stay with long term visions, while others may be a little more reactionary to company news or external forces.
With that in mind, the stock market will have a series of headwinds, but for most sectors, the post pandemic economy is strong, and thus the market performance should reflect that. As mentioned, during the pandemic, the market had a very narrowed focus on just tech growth stocks, and ignored many of the industrials because there was great uncertainty as to how long the pandemic would last, but also an underlying belief that their would be a new normal after the pandemic that focused heavily on technology.
Despite this belief still likely holding true, it is understood that human interaction is still desired heavily especially after a pandemic, and thus industrials and other consumer discretionaries had to roar back. Thus the market has broadened. This means that profit taking came with some of these growth names, and it can be expected that the reopening plays might try to catch up a bit to these tech stocks. However the long term sentiment is that the economy is continually geared towards technology, and so many of these covid plays that were strong in 2020, should continue to do well over time, even if their performance is muted by broadening of the market.
The other expected headwinds in this market are strongly tied to characterizations between inflation and interest rates. Part of what made the market do so well for a lot of key names in 2020, is that with interest rates super low, a lot of new money was poured into the economy through stimulus. While it was expected that stimulus prevents the market from crashing by given consumers buying opportunity, a lot of those who were not dependent on consumer discretionary due to high income levels, utilized a time of limited access to activities and influx of money towards the stock market. Because of these influxes and low interest rates, equities were a lot more attractive to buy than bonds, and low interest rates meant greater borrowing power for corporations to yield greater profit margins.
However, now in 2021, inflation and interest rates are on the front line of every investors mind. For those who stick to fundamental investing, the raising of interest rates is an inevitable action needed by feds in order to prevent inflation. Inflation becomes a huge concern because if the market is flooded with demand due to high cash, and the supply chains are limited, this will naturally force commodity prices to go up.
Raw materials and commodities ultimately flow through nearly every corporation in the market, which in return could hit profit margins, and diminish forecasted returns. It is because of this that some investors have either trimmed back or sold off some of their high flying positions, because any long term potential performance of these names on an earnings per share basis has already been baked into to stocks trading at a high price to earnings ratio.
With all this in mind, the key takeaways are that unless you are a trader, you should keep investing in this market, because despite any of these short term concerns, the economy is considered for the most part in a healthy state, and able to take advantage of economic boom following the pandemic. It can be expected though that unlike 2020 where stock prices for many names went up dramatically, that prices will likely be more volatile, and the market may balance out a bit. The concerns of interest rates and inflation could cause some drops in stock prices, however staying long term and focusing on fundamentals, it should be expected that over time your portfolio should perform no problem.