Expect More Market Volatility as We Wind Down 2020

With the fourth quarter yet to come, investors are already looking ahead to what’s in store for the stock market in 2021. Since March 23, the S&P 500 index has been on a tear, rising more than 49 percent as technology has dominated the market. The market is up 3 percent for the year. While there have been a couple of bruising days—like the 126-point selloff on September 3—for the most part, the market continues to move upward and investors remain confident that stocks are the place to be next year.

Stock Market Is the Best, Perhaps Only, Game in Town

So, what is the euphoria driving the market and what do we see ahead? First off, there are no real alternatives for favorable returns in the current market. The 10-year Treasury yield will be anchored below 1 percent for the foreseeable future. Long-term interest rates follow short-term rate movements, and the Federal Reserve isn’t moving the overnight rate for the next two years.

Looking at the bigger picture, the U.S. economy still shows weakness with gross domestic product (GDP) expected to range between 1 and 2 percent after the third quarter’s jump of nearly 25 percent. Don’t be fooled by that number. Economists expected it with states reopening, but from here on, the road to recovery gets much bumpier.

Top Four COVID States Account for 37 Percent of Economy

The virus is still winning the battle even where cases are not spiking since social distancing has a negative effect on consumption as consumers stay home. The four states with the most virus cases (California, Texas, Florida and New York) account for 37 percent of the U.S. economy. That’s a pretty big chunk of recovery dealing with uncertainty. Also, depending on who wins in November, you can expect tax changes in 2021 that could initiate a wave of stock trading that will put further pressure on the S&P 500’s upward march.

If all that’s not enough for the stock market to bounce around like a lottery ball, four of the last five years have seen a fourth-quarter spike in the market’s volatility. Don’t be surprised if we end 2020 and begin 2021 with a run of volatility. It’s going to be a while before the uncertainty fog lifts.