Are the markets returning to normal?
The Covid-19 outbreak hit the markets hard last year, posing significant economic problems, including a short but severe recession. For a while, it didn't seem like anything will go back to how it had been before the pandemic.
For the latter quarter of 2020, the public's focus had shifted from having a vaccine to delivering it efficiently to everyone who needed it most. Fighting the virus has been a journey of many steps, and after over a year, there now seems to be a light at the end of the tunnel
The economy is beginning to bounce back based on optimism that the vaccines will help economies and businesses return to normal.
Is the optimism warranted, and will the markets continue to react positively to our eventual return to normal?
The outlook, normal
Although the economy has regained much of its lost ground over the past year, its performance has been lackluster overall.
On March 26, the S&P 500 hit a record peak for the week, the Dow soared 450 points, the NASDAQ gained 1.2 percent, and the other indices rose sharply following reports predicting low inflation ahead.
At the close of markets last week, real estate, oil, electronics, and materials had the highest returns.
Indices surged on news of the stimulus plan, Powell's pledge of low inflation, and lower bond yields, which are helping investors feel more confident.
Nonetheless, household spending dropped $149.0 billion, or 1% in February, while personal income fell $1,516.6 billion, or by 7.1 percent.
According to UBS, the U.S. economy will expand 7.9 percent from the fourth quarter of 2020 to 2021.
This is mostly attributed to Biden's proposed stimulus funds.
Vaccine distribution
The astonishingly fast production and acceptance of Pfizer-BioNTech and Moderna vaccines continued to favorably affect market sentiment in the final months of 2020 and this continues to be viewed as a promising sign for the economy's long-term wellbeing.
With Pfizer-BioNTech and Moderna vaccines now in large-scale development, the question now is how quickly and widely will the vaccines be distributed over the coming months.
This will in essence determine when the economy will fully recover.
Analysts are forecasting that by the end of 2021, the vaccines would have drastically stopped the spread of COVID-19.
For now, governments are fast-tracking vaccine deliveries which are expected to be universally administered by the end of the second quarter or early in the third quarter of 2021.
Lifting travel bans
The U.K. recently announced that it will lift the lockdowns in June. Many European countries have hinted that they'll also be lifting lockdowns soon.
Travel controls, including strict social distancing laws imposed in reaction to the COVID-19, will be gradually lifted. Airline travel that was negatively affected by the pandemic over the past year will begin to pick up again.
In the most recent quarter, several airlines have started to see changes. However, the travel industry is not expected to recover quickly. Some countries will recover faster than others, and different countries will be imposing different regulations on the industry as a whole.
Broader market outlook
Small businesses are projected to recover, although painfully, thanks to stimulus funds. As vaccines become more widespread, sales in travel, hotels, professional services, and other industries will rise.
The S&P 500, NASDAQ, Russell 2000, and Dow Jones Industrial Average all look steady across the coming year.
With stimulus being introduced and a promising employment report published last Thursday, it doesn't look like anything can happen to break the trend.
According to Goldman Sachs, GDP will rise at a 5.3 percent annual rate in 2021, with an unemployment rate of 5.3 percent. They expect the S&P 500 to climb 17% to 4,300 points, led by a 30% increase in corporate earnings.
Medical and health care (biotech) customer discretionary (travel, entertainment, retail) technology (cloud computing companies, and technical service industry companies), Power stocks (oil, renewable energy, power, etc.) are some of the best industries to watch in 2021.
However, most analysts say the key to making a more accurate 12-month prediction this year, is waiting until the bulk of the 40+ population is vaccinated. That's when the future of the markets will begin to get clearer.
Key currencies
The U.S. Bureau of National Statistics announced earlier this month a higher-than-expected US GDP. Findings indicated that the economy had expanded faster in the fourth quarter, hitting 4.3 percent, 0.2 percent more than anticipated.
The US job market is beginning to show signs of accelerating growth, which has encouraged outlooks for an early economic rebound.
The jobless reports in the United States have fallen to their lowest amount in a year, as more Americans get vaccinated, and business laws in many states relax.
GBP
Over in the United Kingdom, there's been a change in expectations about the Bank of England's policy. While the bank's reduced its short-term estimates due to coronavirus constraints, it still expects the economy to rebound strongly later this year.
Overall, however, UK fundamentals remain highly volatile, limiting the potential for independent currency gains.
Trends in the global economy and the dollar will also boost Sterling's movements, with more space for the pound to grow if the global economy recovers strongly.
EUR
The recent rise in bond yields, including those issued by Eurozone governments, indicates that there's no significant tightening in monetary policy. While data reflected optimism over a post-pandemic economic recovery.
An interest rate reduction is probably unavoidable however a decision to raise bond purchases is likely and that'll be negative for the EUR/USD. This can have an effect on the pair's success for the rest of the year, and we could see a bearish run.
JPY
The Bank of Japan (BOJ) is in a difficult situation and it's been there for a while with inflation and development running slow and getting worse since the coronavirus outbreak.
As a result, the Bank of Japan's governor Haruhiko Kuroda announced a decision to keep monetary policy on hold for another six months in order to fulfill the bank's 2% inflation target.
The Yen gained against the greenback last week, marking its second consecutive weekly advance. Still, we may see a USD/JPY moving higher in the long term because of a stronger dollar.
CHF
The SNB supports its forecast for GDP growth of 2.5 percent to 3 percent in 2021. This activity is projected to rebound to pre-crisis levels in the second half of the year.
In the current scenario, both the inflation outlook and the growth projections for Switzerland and the rest of the world are filled with confusion.
As a result, the USD/CHF will most likely stay over 1.000 by the end of 2021.
What's Next?
The hope is that, at some point in 2021, the global economy will eventually restart a "steady state" situation, shifting to something more similar to what was considered natural prior to the pandemic.
Several markets could be positioned to prosper indefinitely from improvements brought on by the pandemic's emergence.
Cloud computing and video streaming are two services that analysts are predicting will continue to evolve in 2021.
However, as the "steady condition" returns, it may take some time to truly distinguish the real market winners and losers.
When the time comes headline events will take a back seat, and traditional market fundamentals like corporate earnings are more likely to forecast investment success.
So, analysts advise maintaining a long-term, well-diversified investing and trading policy that
fits with your risk exposure appetite.
