Is 2021 The Year Of Multiple Contraction?

January will be interesting for the market and not just because some people will take profits in the hottest stocks because they delayed selling to avoid taxes for a year. The main issues in play are stimulus, the election, and the vaccines. This is like déjà vu for the market because we just got a stimulus and the election was in November. The Georgia Senate races are going to determine the balance of power in the Senate on January 5th.

There isn’t as much hedging as there was around the November presidential election. The unwind of the hedges and the vaccine news caused the massive rally in November. The other difference is the two races are very unpredictable. The polls are much closer than the presidential ones as Biden was leading solidly before the election. One of the takeaways after the November election was that there wasn’t a blue wave. This was bullish for the long bond. If the Dems win both seats, that trade reverses, and yields will spike.

While the stimulus was just passed, the economy probably won’t be fully recovered within the 11 weeks unemployment checks will go out for. Furthermore, there were talks of a $2,000 stimulus that didn’t lead to a Senate vote. Another stimulus might come if the Dems win the election.

Finally, vaccine distribution is starting to pick up which could mean the beginning of the end of this virus is finally here. The speed of the distribution and how it is executed with a new administration (Biden) coming in are important variables. As of January 3rd, 4.33 million doses were given. That hasn’t had any noticeable impact on hospitalizations which are still at a record high. The COVID-19 data has been incomplete to start the year because of the holiday.

Biggest Stock Market Recovery Ever

The stock market had its biggest drawdown ever in a year it ended positively. It’s not like the market was barely up either. This was a better than average year as the S&P 500 rose 16.26% in 2020. As you can see from the table below, the maximum drawdown in 2020 was 33.9%. This drawdown size was typical for a year with a bear market except we didn’t actually have a bear market.

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