Steve Kemler: Thoughts on the Equities Markets 2021

By Veselina Dzhingarova 

In an unprecedented move, the Federal Reserve stimulated the US economy with trillions of dollars in cash and loans to help businesses and citizens survive the COVID-19 pandemic, at least in the short-term. This herculean effort is helping but it is unclear if it will be sufficient in the mid-to-long term. What lies ahead for the US economy and equity markets? Steve Kemler, a respected, entrepreneurial business leader with successful ventures in healthcare, education and real estate offers his insights into how the stock market may perform as we move into 2021. 

The bulls are grazing in the pastures and the bears have emerged from the deep woods – but which will prevail?Steve of course believes that the COVID-19 stock market correction will of depend in part on how soon the US – and affected countries worldwide – can address the pandemic and how long it will take to implement a safe, viable way toward to what is commonly referred to as, “the new normal.”A unique part of this, as Steve points out, is the extreme volatility of the markets based on even relatively small adjustments to the projections relating to the spread of COVID-19.  

Death from the Coronavirus are well into the tens of thousands, unemployment claims are skyrocketing, business are shuttering (many for good) and we are entering what likely will be a multi-year, consumer-driven recession. While the full breadth and length of the economic contraction is unknowable until we have a better handle on the virus, it is likely to be equal to or worse than what the country experienced in 2007-2008.

So why have equity prices already regained much of the losses they sustained between late February and mid-March? Kemler believes there are two primary drivers. The first is the massive stimulus being provided by the government. Direct aid to individuals and business is already in the low trillions of dollars. Quantitative easing, along with the Federal Reserve’s increased balanced sheet, is even larger. This is a cash infusion into the economy and the market on an unprecedented level and all ships are rising.

The second key driver is that there are currently few good alternatives to the stock market for investing the significant levels of available cash. At the beginning of the Great Recession CD interest rates were in the 4-5% range. Today they approach zero. With restrictions imposed by virus mitigation efforts and the resulting recession, most categories of real estate are at risk, as are commodity prices. So that leaves equities as the winner by default, regardless of decreased earnings potential.

This is a very different scenario than in prior downturns and not necessarily the most sustainable foundation for market gains to be built on. But will it last? With elections being held at the end of the year it is likely that both parties will facilitate massive continued stimulus at least throughout 2020. It is also unlikely interest rates will meaningfully rise any time soon. So could the market remain materially disconnected from the economy into 2021?For now, it looks very possible.