2020 In With A Whimper, Out With A Bang – Equity Bulls Have High Hopes For 2021

The S&P 500 (SPX) closed 2020 with a new high. Momentum was very strong in November and December. In the past, more gains followed in the following year. For that, several things have to fall into place, including how flows, margin debt, foreigners and corporate buybacks behave.

The year 2020 began with a whimper and went out with a bang.

Last year, the S&P 500 opened January with a new high but only to reverse to end the month down slightly. This was then followed by a vicious February and March. By the time the large cap index bottomed at 2191.86 on March 23, it was down 32.2 percent for the year. In the next nine-plus months through the new intraday high of 3760.20 on December 31, it shot up 71.6 percent, closing at a new high of 3756.07. For the year, it was up 16.3 percent.

Historically, there have been seven other years in which the index closed at a new high (Table 1). In five of them, the S&P 500 went on to rally in the following year. In 1955, after a 45-percent jump in 1954, it rallied another 26.4 percent. The two down years were 2000 and 1929. Equity bulls do not obviously expect a repeat of these two years, but of how the other five ended.

Bulls should be heartened by how November and December fared, with the S&P 500 up 10.8 percent and 3.7 percent respectively. Momentum decisively shifted to a higher gear post-November 3 presidential election and particularly after Pfizer (PFE) and Moderna (MRNA) delivered positive vaccine news – on November 9 and 16 respectively.

Chart 1 looks at how the S&P 500 fared after it rallied 14.9 percent over two months. Basically, the idea is to see if the two-month thrust higher carried enough momentum to push it still higher. Turns out, more often than not, momentum persists. Some of them came after major lows, including last March. As the orange vertical line shows, we just had another 14.9 percent move. So, the obvious question is, will history repeat itself?

One of the things bulls are pinning high hopes on is the so-called cash-on-the-sidelines. Around the time stocks bottomed last March, US money-market assets stood at $3.9 trillion. Stocks put in a low, but these funds kept attracting money for another couple of months. By the week to May 20, there were $4.8 trillion parked in these funds. As of last Wednesday, this dropped to $4.3 trillion, down $492.2 billion from the high.

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