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Wall Street Defeats Pandemic: Bulls Set to Roar in 2021

Wall Street defeated the coronavirus-led pandemic last year, surprising a large section of economists and financial experts, who were busy projecting a negative picture for market participants during February to March. The year that passed was dramatic with the termination of the largest bull market in early March, formation of the shortest bear market and the confirmation of a new bull market.

The major stock indexes —  the Dow, the S&P 500 and the Nasdaq Composite — rallied 7.3%, 16.3% and 43.6%, respectively, in 2020. Moreover, small-cap specific Russell 2000 jumped 30.6%. By any means, this is an impressive performance considering the fact that the unprecedented health hazard put the global economy at a complete standstill from March to May. Can Wall Street maintain this momentum? Let's discuss briefly.

Unprecedented  Recovery Outshines Sudden Setback  

Wall Street witnessed an unprecedented recovery after falling to the coronavirus-induced bear market trough on Mar 23. The Dow, the S&P 500 and the Nasdaq Composite soared 68%, 71.4% and 94.4%, respectively, from Mar 23 to Dec 31. The Russell 2000 and its peer the S&P 600 jumped 104.3% and 87.9%, respectively. The mid-cap centric S&P 400 climbed 89.3% in the same time period.

This astonishing broad-based recovery of the U.S. stock markets confirms market participants' confidence in risky assets like equities irrespective of the global outbreak of the pandemic and the resurgence of COVID-19 infections since September. Meanwhile, most of the major European stock markets ended 2020 in negative territory with a loss of at least 3.8% while the emerging markets of the Asia-Pacific region had a mixed year.

Economic Stimulus and Approval of Vaccines

The impressive recovery of Wall Street in 2020 was not without reasons. The U.S. government had injected a massive $2.2 trillion of coronavirus-aid package in March. The major components were direct payments as unemployment benefit and a significant boost to small businesses. In December, the U.S. Congress approved another $900 billion fiscal stimulus, which may increase in 2021.

The Fed is pursuing a remarkable ultra-dovish monetary policy since March 2020. The benchmark interest rate had been reduced to 0-0.25% in March and is likely to stay there at least up to 2023. In order to ensure sufficient liquidity in the market , the central bank will continue to buy at least $120 billion of bonds ($80 billion of Treasury bonds and $40 billion of agency mortgage-backed securities) per month until substantial progress is made toward its maximum employment and price stability goals.

The FDA has authorized two COVID-19 vaccines this year, which means that the economy will reopen and gradually operate at the pre-pandemic level. Since the lockdowns imposed in March, the U.S. economy is operating at a significant sub-optimal level. Approval of vaccines will have a strong impact on the stock market.

Reopening of the Economy With Robust Pent-Up Demand

Strong pent-up demand is likely to drive the U.S. economy in 2021. Personal savings rate is high in 2020 due to concerns over coronavirus-led economic uncertainties. Consumers were restrained or restricted by the government to spend on those items that were closed during lockdowns. Reopening of the economy with the easing of the pandemic will significantly boost personal spending, the largest component of the U.S. GDP.

The predominant force, behind Wall Street's impressive recovery from the short pandemic-led bear market  was the technology sector. However, market participants' are gradually shifting toward the cyclical sectors besides the growth-oriented technology stocks on expectations of a systematic reopening of the U.S. and global economies.

Strong Economic Fundamentals

A section of the economists and financial experts remain concerned that the stock market is overvalued. The Dow and the S&P 500 recorded all-time highs on Dec 31. The Nadaq Composite registered an all-time high on Dec 29. Moreover, the Russell 2000 achieved this milestone on Dec 28.

In reality, the U.S. economy remained stable despite the global outbreak of coronavirus and its devastations. The first trench of fiscal stimulus — the CARES ACT — ended in July. However, the economy has grown in the last five months albeit at a slow pace despite the lack of a fresh round of fiscal stimulus.

The net worth of American households reached a fresh all-time high of $123.52 trillion in the third quarter of 2020 despite the pandemic. The value of equities increased approximately $2.8 trillion while the value of real estate held by households rose around $430 billion. The housing market remained robust primarily due to record-low mortgage rates. According to Mastercard SpendingPulse, U.S. retail sales grew 3% over the extended 75-day holiday period in 2020.

Moreover, in its latest estimation on Dec 23, the Atlanta Fed projected that fourth-quarter 2020 GDP will increase 10.4% after increasing a record 33.4% in the third quarter. Projections for corporate earnings are also growing since July 2020. At present, the consensus estimate is that the 2021 earrings of the S&P 500 Index will increase 22% on 7.7% higher revenues after it is expected to decline 16.9% in earnings on 3.9% lower revenues in 2020.

Therefore, the reopening of the economy, strong pent-up demand and consumer confidence, a V-shaped recovery of U.S. industries and expectations of higher corporate profits will justify current stock market valuations.

How to Invest

At this stage, several stocks are available that looks attractive for future growth. However, picking them on the following four criteria will make the task easy. First, select large-cap (market capital > $50 billion) stocks as these companies have a stable business model. Second, these stocks witnessed solid earnings estimate revisions for 2021 within the last 60 days.

Third, these stocks skyrocketed in 2020 and still have strong upside left reflected by a long-term (3-5 years) growth rate of more than 10% compared with the S&P 500's estimated long-term growth rate of 8.9%. Fourth, each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Eight stocks have fulfilled our selection criteria. These are: Deere & Co. DE, FedEx Corp. FDX, Micron Technology Inc. MU, General Motors Co. GM, Tesla Inc. TSLA, NVIDIA Corp. NVDA, Alphabet Inc. GOOGL and Danaher Corp. DHR.

The chart below shows the price performance of the above-mentioned eight stocks in 2020.

 

Zacks Top 10 Stocks for 2021

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Micron Technology, Inc. (MU): Free Stock Analysis Report
 
NVIDIA Corporation (NVDA): Free Stock Analysis Report
 
Deere & Company (DE): Free Stock Analysis Report
 
General Motors Company (GM): Free Stock Analysis Report
 
FedEx Corporation (FDX): Free Stock Analysis Report
 
Danaher Corporation (DHR): Free Stock Analysis Report
 
Tesla, Inc. (TSLA): Free Stock Analysis Report
 
Alphabet Inc. (GOOGL): Free Stock Analysis Report
 
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