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21 Stock Market Trends to Watch in 2021

Back in December, we teamed up with Josh Brown, CEO of Ritholtz Wealth Management, to bring you Hindsight on 2020: Charts of the Year. Together, along with insights and perspectives from top advisors, investors, and #FinTwit leaders, we recapped the most noteworthy market trends of 2020—and why they happened—all in one memorable webinar.

With 2020 fully in the rear-view mirror, let’s examine how the patterns seen in 2020 point to what 2021 has in store for investors. Without further adieu, here are 21 Market Trends to Watch in 2021:

All chart data is as of January 31, 2021. All insights and perspectives noted below were shared in YCharts’ December 2020 webinar.

 

Will Small Cap Resiliency Continue?

Michael Batnick called out the incredible comeback of small caps, measured by the Russell 2000’s run from a 41.9% drawdown in March 2020 to new all-time highs before year’s end. Russell 2K constituents that energized the rally were Penn National Gaming (PENN), Deckers Outdoor (DECK), and Redfin (RDFN).

Russell 2000 Small Caps Level Off High

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Small caps are considered a “high risk, high reward” asset class, but with large and mega caps having led the market for years, small cap returns rarely made headlines. However, in the last quarter of 2020, when COVID-19 vaccines first started rolling out, the tables turned and small caps outperformed the broader market. Will they keep it up in 2021?

 

Decisions, Decisions: S&P 500 Equal Weight or Market-Cap Weight?

These days, we’re well into the adoption curve of index funds and passive ETFs. So is it time for investors to rethink how they get broad market exposure?

S&P 500 Equal Weight vs. Market-Cap Weight

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Lyn Alden says yes; amid the COVID-19 recovery, a greater number of stocks have advanced and market breadth has widened. When that happens, market cap-weighted S&P 500 ETFs like SPY or VOO tend to lag an equal-weighted version of the index—and the ratio of equal weighted to market cap weighted total returns is on the rise as of late, currently at about 1.2. Long-term, passive investors might consider the Invesco S&P 500 Equal Weight ETF (RSP) or something similar, says Alden.

 

IPOs Had a Big Year — What’s In Store Next?

In 2020, IPO may well have stood for I’m Popping Off. Over the last couple years, names like Beyond Meat (BYND), CrowdStrike (CRWD), Snowflake (SNOW) and Chewy (CHWY) made their public debuts to considerable fanfare and double digit gains. So far in 2021, a few of the most recent IPOs have continued climbing higher.

IPO Returns vs. IPO ETF

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Along with the popularity of individual IPOs, the Renaissance IPO ETF—trading under the apt “IPO” ticker—has built a hype train of its own. The ETF had $40.5 million in assets under management on December 31, 2019 and ended 2020 with more than $740 million, a whopping 18x increase.

 

Is Bitcoin Earning a Place in Portfolios?

It’s not 2017, but here we are talking about Bitcoin again. However, according to Tyrone Ross, with Bitcoin trading at levels 3x higher than those in 2017, this time feels different. 

Bitcoin bulls such as Paul Tudor Jones and Henry Druckenmiller—and now Elon Musk and Tesla—have been touting the cryptocurrency’s potential, endorsing its usefulness for storing value. Coinbase, one of the largest retail cryptocurrency brokers, is set to IPO in 2021.

Ross, CEO of OnRamp Invest, thinks Bitcoin and other cryptos may be a solution to the ongoing issues of inaccessibility and inequality in investing.

Bitcoin RSI vs. Price

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Read our 5 Things Advisors Should Know About Grayscale Bitcoin Trust.

 

How Far Through the Roof Will Mortgage Originations and ReFi’s Go?

If you think the trend in mortgage rates on this 10 year chart is dramatic, you should see its decline over the last 40 years. The 30 year mortgage rate was averaging 15% at the end of 1980, 7.3% on the last day of 2000, and closed out 2020 at just 2.7%.

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When Blair duQuesnay shared her 2020 chart, she was in awe of its decline, nearly halving in 2020 alone. Many of her clients have taken advantage of the opportunity to refinance their home loans, and many more Americans will presumably do so too as rates continue trending downward.

 

Is Crude Oil’s Negative Nightmare Over?

When global travel was halted due to COVID-19, demand for oil diminished so much that producers began paying their customers to take crude off their hands. There was nowhere to store the excess oil, and shutting down extraction operations was too expensive.

Crude Oil Spot Price

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Negative oil prices had never been seen before April 2020, and according to Charlie Bilello, it may be a very long time until we see anything as extreme. Already trending down since 2008, energy prices are now in radically different territory than before. Was this truly a one-off event, or the proverbial canary in the coal mine?

P.S. If it were still open, how crazy would the CME oil options pit have looked when this happened?!

 

Growing Appetite for Corporate Debt: Will investors Stay Hungry?

With both equities and fixed income crashing back in March 2020, Michael Antonelli used LQD, an ETF holding investment-grade corporate bonds, to illustrate that “investors no longer wanted investment grade debt, they just wanted their money back.”

iShares Investment Grade Corporate Debt

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When COVID-19 first hit the United States in a significant way, there was a very legitimate fear of widespread bankruptcies, even by relatively stable companies. The Fed stepped in to prevent that from happening, and investor demand for corporate debt continued to be strong ever since, but is pulling back slightly due to recently rising rates. Moves by the Fed will be closely monitored in 2021, as they will affect the demand for corporate debt.

 

Can Investors Bank on Normalized High Yield Debt Spreads?

Due mostly to the Fed’s swift intervention, but surely assisted by investor optimism and vaccine rollouts, high yield debt spreads have miraculously returned to pre-pandemic levels. Seen in this chart, the US High Yield Master II Option-Adjusted Spread measures the difference between the yield of low-grade corporate bonds and the yield of US treasuries.

Tobias Carlisle noted that the 2020 spike was far less severe than that of 2008, but it looked like spreads would blow out again in the moment. Assuming this spread stays where it is, it indicates that the Fed’s actions successfully prevented defaults by companies with low-grade debt, and defaults on higher-graded debt, in turn.

Master II High Yield Debt Spreads

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Are ESG Funds the New Modern Portfolio?

Environmental, Social, and Governance (ESG) investing has made waves in recent years. This trend of investing in socially conscious companies, based on both individual preferences and the belief that these companies will outperform in the long term, has translated into solid growth over the past three years, especially in the USA.

While domestic ESG funds such as the iShares ESG Aware MSCI USA ETF have outperformed its Emerging Market and Europe/Far East counterparts, ESG vehicles are collectively on the rise in 2021, indicating that traction toward this investing style is likely to keep up.

iShares ESG Aware MSCI, USA/EM/EAFE

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Tesla to the Moon—Is There Anywhere to Go Beyond?

Our own fearless leader and CEO, Sean Brown, has been closely following Tesla (TSLA) for a couple years now. The electric vehicle manufacturer starts 2021, its first full year as an S&P 500 constituent, as the index’s 4th largest holding by market cap.

Tesla vs. Berkshire Hathaway Market Cap, Free Cash Flow

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This comparison of Tesla’s market cap and free cash flow to that of Berkshire Hathaway (BRK.B), the 8th largest S&P 500 constituent, illustrates the speculative nature of the EV-maker’s rise. Tesla was trading hands at $83.67 per share on the last market day of 2019, and finished 2020 at an astounding $665.99 per share. What will one share of Tesla cost at the end of 2021?

 

Time to Double Down on Online Gambling?

Penn National Gaming (PENN), an operator of gaming & racing properties and online gambling in six US states, saw its share price rise quickly in early 2020 when it announced a minority stake in Barstool Sports. Despite its pandemic-induced 90% drawdown, Ramp Capital and many others were grateful for PENN’s exposure to Barstool, helping to launch a stellar 2020 comeback.

PENN Share Price

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With more states legalizing both online gambling and sportsbooks—Michigan recently allowed sports betting, and New York Governor Andrew Cuomo has voiced support for internet gaming—investors will be keeping a close watch on companies like PENN and DraftKings (DKNG).

 

Can Thematic and “Reopening” Stocks Open Up Opportunities?

Nate Geraci shared with us that the rapid rise in AUM by the US Global Jets ETF (JETS), the COVID-19 pandemic fueled demand for thematic ETFs in interesting ways. Sentiment toward “BEACH” stocks quickly transitioned as airlines, casinos, and hotels became “reopening” stocks, and potential value opportunities. 

JETS Thematic Investing AUM

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With everyone trying to spot companies, sectors, and industries that will thrive in a post-pandemic world, additional themes like esports, solar energy, cannabis, and mobile payments could be poised to benefit.

 

Emerging Markets Emerge, but Will They Stay Ahead?

There’s a growing consensus that emerging market stocks could break out in 2021, largely thanks to a weakened US dollar. Policy makers and the Fed poured liquidity into the market in 2020 and are expected to continue doing so, leading to a further depressed USD.

Emerging Markets S&P 500 1-Year Total Returns

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At the same time, emerging market indices have been flat for the better part of a decade. With US equity valuations setting new highs, the relative valuation of EM stocks compared to their US counterparts has declined.

 

Will Investors Snack on Higher Returns?

The chip trade was one of the biggest stories in 2020, with the world demanding more semiconductors to power their devices and at-home workstations.

But Caleb Silver didn’t mean that chip trade. He was talking about…potato chips. Shares of Utz Brands (UTZ)—parent of snack brands such as Boulder Canyon potato chips and TGI Friday’s Potato Skins—are nearly double those of the iShares PHLX Semiconductor ETF (SOXX) from February 2020 to date. With staying-at-home still being an encouraged practice, it appears snacking behavior is, too.

UTZ, PHLX Price Change

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Does Slow and Steady Win the Race Anymore?

An unprecedented adoption of technology in this stay-at-home period—everything from video calls to online shopping—helped propel the tech-heavy NASDAQ to be the major U.S. index winner of 2020.

SPY, QQQ % Change

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As Dave Nadig pointed out, QQQ outperformed the S&P 500 in 2020, and is currently doing so YTD. The “broad market exposure” that QQQ provides is less than that of SPY, but QQQ’s performance may earn it a place in investor portfolios over its broader, larger counterpart.

 

How Long Can “Work From Home” Stocks Work for Portfolios?

Skype Suits, backgrounds filled with kids & barking dogs, and “accidentally” talking on mute are what most will remember about the Great Work From Home Revolution of 2020. But according to Shirl Penney, CEO of Dynasty Financial Partners, investors ought not forget the stunning gains telework companies like Zoom (ZM), DocuSign (DOCU), Slack Technologies (WORK), and Microsoft (MSFT) posted in 2020.

Work from Home Stocks

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With more and more American employees wishing to continue working remotely, “Work From Home” stocks should be closely followed in 2021 as well.

 

Value vs. Growth: Who Will Finish Ahead This Year?

The debate rages on: Value or Growth? Over the last 10 years, the 3-year total returns of the Russell 1000 Growth have outperformed its Value counterpart, with 2020 being the year Growth pulled significantly ahead of value.

Russell 1000, Value vs. Growth

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However, beginning in September 2020, Value started to close that performance gap and has outperformed Growth so far in 2021. The value vs. growth dynamic will be very closely watched by portfolio managers this year.

Interested in learning about these two schools of stocks? Read our Value vs Growth Stocks: Which Is Right for You?

 

Do Investors Need to Worry About Valuations Anymore?

Continuing the Value vs. Growth discussion, Beth Kindig has shown situations where traditional valuation metrics have largely been pushed aside.

ZM, WFC Price-to-Sales Valuations and Returns

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Despite Zoom Communications (ZM) stock possessing a lofty Price-to-Sales ratio, shares are up nearly 450% since the end of 2019. On the contrary, Wells Fargo (WFC) has been punished despite trading at a relatively low Price-to-Sales ratio. Who flinches first, investors who aren’t worried about high valuations, or the “overvalued” stocks themselves?

 

Bottoms and Tops: Will They Last Forever?

If 2020 taught investors one thing, it would be that even a global health pandemic couldn’t contain the market’s resiliency.

^SPX, ^DJI Tops and Bottoms

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Dasarte Yarnway demonstrated that in times of despair, the sky doesn’t fall forever. While the Dow Jones Industrial Average and S&P 500 both suffered precipitous declines in 2020, the bottoms were very brief. And though the remainder of 2020 brought several peaks and valleys, those too didn’t last forever, a reminder to investors to continue looking “onward to greatness.”

 

Is the Market Moved by Market-Moving News Anymore?

The U.S. welcomed in 2021 with a contentious election, civil unrest, and further spread of the novel coronavirus. These are headlines you’d typically react negatively to—but not stock markets, said Howard Lindzon.

Russell 2000 50-Day, 200-Day SMA

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Since the market bottom, technical indicators such as 50-day and 200-day Simple Moving Averages as well as the Relative Strength Index have consistently risen. Despite the waves of negative headlines, investors continue to pile into risky assets. With headwinds from last year sailing into 2021, it will be another testing year for the market’s resiliency.

 

What’s More Important — Timing the Market, or Time in the Market?

Death, taxes, and time not slowing are three certainties you can count on in this world. Rita Cheng illustrated the importance of staying invested in 2020, which would have ensured you didn’t miss out on a major comeback and quarters of positive returns. Investors who spent this January in the market are currently being rewarded with more positive returns in most places.

Time in the Market: American Funds, Vanguard, iShares

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