By: Dividend Sensei
To say it was a dramatic year on Wall Street would be an understatement. 2020 saw the highest volatility in history. This includes the fastest bear market in history, as well as the fastest recovery to new all-time highs.
Ultimately the S&P 500 rose 17% in 2020 despite falling 34% in March. That’s something that almost no one would have predicted had you told them 2020 would see the worst pandemic in over a century. A pandemic that triggered the worst recession in 75 years.
In 2021, here’s what investors can expect. More importantly, here are the fundamental reasons that you should be potentially excited for the coming year. But equally important, how you can protect your retirement portfolio from downside risk in 2021.
What to Expect In 2021
2021 is expected to see the strongest economic growth in 21 to 50 years. Why?
- The highly effective vaccines
- An extra $1.1 to $3.4 trillion in stimulus from the new Democratic government
- The Fed has said it will keep short-term interest rates at zero through the end of 2023.
This creates the backdrop for a potential continued market rally. However, prudent risk management is still the cornerstone of long-term financial success.
Markets Will Always Be Volatile and Unpredictable
There is no greater wealth and income compounding tool than the stock market.
Since 1926 stocks go up 75% of all years. But the road to riches is a bumpy one. Since 1945 and 2009 we’ve had dozens of 5+% pullbacks and corrections. On average, one every six months. It’s very likely that we’ll see this historically normal volatility in 2021 as well.
While the cause of any downturn is impossible to predict, there are two primary risks that are likely to contribute to the next market downturn.
First is the pandemic itself. The US vaccination rollout is going far slower than hoped.
Several new more infectious strains of the virus have been detected globally and in the US. The good news is that studies show it’s none are more lethal than the most common strain. Further good news is that vaccines are still likely to protect against most of them.
The bad news is that health experts say these more infectious variants are likely to be spreading mostly undetected throughout the US. This is why the CDC has warned that new surges might be coming in the coming months.
The market is currently 39% historically overvalued. This means stocks are priced as if nothing bad will ever happen. Something bad will always happen in the future.