A New Year, a New Downturn on Wall Street

Wall Street finds it difficult to wash off the stink of 2020, as markets plummet to mark the start of the new year.  

People walk by an electronic stock board of a securities firm in Tokyo on Monday. (AP Photo/Koji Sasahara)

MANHATTAN (CN) — The waking nightmare of 2020 is over from a calendar perspective. For Wall Street, however, the miasma of it has not yet washed off.

On Monday, the Dow Jones Industrial Average fell 382 points, a 1.25% decrease. At one point the Dow had retreated about 600 points, marking the potential for a major run on the index before investors clawed back some of the losses. The S&P 500 and Nasdaq fared slightly worse, dropping 1.48% each.

Major economic reports — including retail reports from Christmas, ADP’s jobs report and the Federal Reserve’s meeting — are expected later this week. With the dearth of economic data on Monday, investors — much like political junkies and fans of Ray Charles — likely have Georgia on their mind.

Tuesday’s run-off for that state’s two senate seats will undoubtably impact incoming President-elect Joe Biden’s legislative and regulatory agenda. Recent polls for the race show Democrats Joe Ossoff and Raphael Warnock slightly leading their Republican opponents David Perdue and Kelly Loeffler.

If Democrats nab both Senate seats, it would “facilitate a swifter and more aggressive spending package in 2021 than can help propel the recovery more rapidly under the split Congress scenario,” wrote James Knightley, chief international economist at ING.

Regardless of a Democrat- or Republican-controlled Senate this year, however, Knightley noted that any planned tax hikes likely wouldn’t happen until 2022 or 2023.

Though he predicts 2021 on the whole will be a positive one for markets, he said the short-term political turmoil this week likely will continue to roil markets.

“Potentially violent scenes at a time when Covid vaccinations are proceeding at a slower than hoped pace, coupled with the prospect of weak data through the week will underline the task that President-elect Biden has on his hands,” Knightley wrote. “So while medium-term outlook remains very positive — even more so than the consensus — we continue to see downside risks in the very year (2 to 4 month) term that could be somewhat challenging for financial markets.”

Even without the potential shakeup from Georgia’s run-off or President Trump’s relentless attempts to overturn the election results, bull rallies are likely to wind down even if volatility in the market remains high.

For example, Nasdaq’s performance in 2021 will largely stem from “how the market discounts 2022’s economic growth and U.S. performance earnings,” Jessica Rabe, co-founder of DataTrek Research, predicted last month. “But another +10% return for the Nasdaq won’t come as easily as the market tends not to underestimate results three years in a row.”

Rabe noted the Nasdaq rallied in 2019 mostly due to a large sell-off in the final quarter of 2018, as well as the Federal Reserve’s decision to pivot to lower interest rates. “Replicating these tailwinds for another double-digit performance [in 2021] will be tougher, but not impossible given the severity of the latest recession,” he wrote.  

Many have credited the Fed’s efforts — which included various lending facilities and low interest rates — with keeping markets afloat and calming nervous investors.

Others are less concerned about the political cacophony but still expect high volatility, which could push investors away from equities and back into bonds and gold.

“While 2020 turned out to be a year of opportunity for investors, we firmly believe that volatility will continue in the New Year and present additional opportunities,” wrote Scott Wren, senior global market strategist at Wells Fargo Investment Institute, in an investor’s note last week.

Wren noted that high-yield bonds and commodities, in particular, were extremely sensitive to the pandemic and vaccine-related news, as well as Congress’ attempts to pass stimulus legislation.

On the Covid-19 front, the vaccine roll-out, which was hampered by a rocky start, has begun to pick up some steam. More than 4.2 million Americans have received their first dose of the coronavirus vaccine, with the speed picking up in the last few days, according to an announcement from Dr. Anthony Fauci. U.S. health officials now say they can cut the doses of the Moderna vaccine in half to improve the vaccination roll-out, noting that half the dosage provides the same immunity response as the full dose.

To date, nearly 85 million cases of Covid-19 have been reported worldwide, with more than 1.8 million deaths, according to data compiled by Johns Hopkins University. In the United States, 20.6 million Americans have contracted the disease, while more than 351,000 have died.

A new strain of the virus, which had originated out of the United Kingdom and then was found in California and Colorado, was confirmed late Monday to have hit New York, as well. Still, investors are hopeful the latest surge in cases and hospitalizations will soon recede.

“A waning virus, together with an improving economy, set a good backdrop early in 2021,” James Meyer of Tower Bridge Advisors wrote. “The risks are that investors become too euphoric or that inflation arrives sooner rather than later. The former is always a concern. The latter is unlikely to be evident for at least several more months, if not years.”

Meyer notes that while the vaccine rollout was slower than predicted, it is accelerating and everybody who wants a vaccine should be able to get their first shot by the end of the second quarter. 

“In today’s Covid-19 world, the view is of crowded hospitals, if not worse,” Meyer wrote. “But the reality is that while our healthcare system is strained, it isn’t broken.”

He continued: “I don’t know whether the surge has already peaked or whether the peak is several weeks away. But it isn’t months away, and that will be pretty news to equity investors as the year begins.”

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