In 2020, investors experienced about a decade of compressed volatility in a single year. The unprecedented uncertainty surrounding the 2019 coronavirus pandemic (COVID-19) sent the S&P 500 (SNPINDEX: ^ GSPC) screams below 34% during the first quarter, only to see the index finish the year up by a double-digit percentage.
Suffice it to say that many old records were thrown into oblivion last year.
Unfortunately, a new year does not necessarily mean the end of unprecedented volatility. There are 10 viable reasons for the stock market crash, again, in 2021.
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1. The vaccine’s effectiveness hype is missing its mark
although Pfizer/BioNTech and Modern impressed the research community with the respective vaccine (VE) efficacy of 95% and 94.1%, the investment community is eager for other drug developers to report their results for COVID-19 VE in the first quarter. That includes Johnson & Johnson (NYSE: JNJ), whose vaccine is administered in a single dose, as opposed to two doses with practically all other COVID-19 treatments. If the Johnson & Johnson vaccine does not deliver exceptionally high VE, doubt about the end of the pandemic in 2021 could creep in and push the market down.
2. Few people receive the COVID-19 vaccine
Another reason the stock market could crash in 2021 is if very few people choose to receive a coronavirus vaccine. Although estimates vary, Dr. Anthony Fauci suggested that somewhere between 75% to 90% of the US population would need to receive the vaccine to develop herd immunity. This is a worryingly high number, especially when most surveys show that only between 50% and 70% of respondents plan to get the vaccine. Without herd immunity, a return to “normal” may not be possible in 2021.
3. COVID-19 variants accelerate a new round of shutdowns
Less than three weeks ago, a new variant of the SARS-CoV-2 virus, which causes COVID-19, was identified in the United Kingdom. The mutability of the virus can cause serious problems. For example, differences in transmission or death rates can induce rigid blockages that further devastate the economy. It is also possible that experimental and approved vaccines for emergency use may prove ineffective or less effective against new variants of the virus.
The fear of the unknown crushed the S&P 500 in March, and could do it again in 2021.
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4. The Georgia Senate’s second round produces a surprise
Politics can also be the downfall of the market. In just two days (January 5), Georgia residents will return to the polls to determine which two candidates should represent the state of Peach in the U.S. Senate. Wall Street has had a split in Congress, with Republicans holding the Senate and Democrats holding the House. Republicans currently have 50 seats in the Senate. They only need to win one of two runoff runs in Georgia to secure a Senate majority for another two years.
If, however, the Democrats win the remaining two seats, it will tie at 50-50. Votes that ended in a tie in the Senate would be undone by Vice President-elect Kamara Harris (after January 20). This would effectively give Democrats control of the Capitol, which could mean big corporate tax increases and much slower profit growth.
5. The additional stimulus is out of the question
Washington, DC, may also disappoint Wall Street if it fails to approve additional stimulus, above and beyond the $ 892 billion deal that President Donald Trump signed on December 27. President-elect Joe Biden has been adamant that he will push for a bigger stimulus deal once he is officially in office. However, the Senate majority leader, Mitch McConnell (R-Ky.), Was less receptive to additional stimulus with each approved bill. A Capitol stalemate may not go well for investors.
6. Loan / credit defaults burden financial institutions
Even if the US stock market and economy are not hip-linked, a growing wave of credit, loan and mortgage defaults in 2021 could mean bad news for financial stocks.
Banks’ shares have generally done an excellent job of distributing capital for loan losses. The point is that it is unclear how much stimulus will be needed for companies and consumers to avoid defaulting on their outstanding obligations. If the Capitol does not approve additional stimulus, or if stricter blocks are imposed by the federal government once Biden is in office, the amount of bad loans that banks are forced to deal with may exceed the worst case scenario.
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7. Share buybacks continue to decline
One of the most hidden impacts of the coronavirus recession is that it has significantly reduced corporate stock repurchases. Data from market research firm Yardeni Research shows that annualized share buybacks for the S&P 500 fell to $ 407.2 billion in the third quarter of 2020. This fell from nearly $ 800 billion on an annualized basis in the first quarter of 2020 (six months earlier). Repurchases can help increase earnings per share and make a public company more attractive. With fewer repurchases, earnings growth could slow down noticeably.
8. Inventories are historically expensive
The stock market can also crash because stock valuations are historically very expensive. On December 29, Shiller’s price / earnings ratio for the S&P 500 – a P / E ratio based on the inflation-adjusted average revenue of the previous 10 years – reached almost 34. This is more than double its average and median over the past 150 years, and is the second highest reading after the dot-com boom in the late 1990s and early 2000s. Historically, when Shiller’s P / E ratio is above 30, bad things happen (that is, the market breaks).
9. Emotions drive the best of investors
Never underestimate the power of short-term traders who overreact to a news event. In the long run, the growth in operating profits is what drives the stock market up. But in the short term, investors’ emotions tend to affect the day-to-day activity of the market. As we saw in March, it doesn’t take much to completely undermine investors’ confidence and panic them. It is possible that this will happen again in 2021.
Image source: Getty Images.
10. History repeats itself
Last but not least, history could simply repeat itself. In the eight previous bear markets, before the decline of COVID-19, there was an aggregate of 13 corrections ranging between 10% and 19.9% in the three years after a bear market fund. In other words, every rebound tends to have one or two major flaws or corrections. If that is true, 2021 may experience one or more of these unpredictable, but somewhat reliable, declines in the S&P 500.