The rise in the S&P 500 since March 2020 has produced one of the strongest bull markets in modern history. Indeed, the main US market index has skyrocketed by 95% from its 2020 lows. Even the FTSE 100 index has leapt by more 43.5% since ‘Meltdown Monday’. After such a strong, sustained recovery, share prices must be heading downward, right? Maybe, but not necessarily. These four trends could lift US stocks and UK shares in 2021/22.
Monetary policy supports share prices
Monetary policy — the actions of central banks — has been a key driver of the post-March 2020 rebound. Major central banks have slashed interest rates to record lows. Also, they have bought trillions of dollars of bonds and flooded markets with cheap money. With monetary policy expected to remain extremely loose in 2021/22, many investors expect this record-breaking rally in share prices to continue. Perhaps the only thing that might change their minds would be rising US interest rates. However, this is unlikely to happen for a year or more. Until then, while the liquidity punchbowl is brimming over, investors want to keep on partying.
Vaccination programmes are accelerating
Before ‘Vaccine Monday’ (9 November 2020), share prices were still depressed, despite rising from their March lows. However, news of several highly effective Covid-19 vaccines sent markets soaring in late 2020. This relief rally continued into 2021, with stocks rising across the globe. Worldwide, over 3.2bn vaccination doses have been given, including 330.6m in the US and 78.9m in the UK. But less than a quarter (24.3%) of the world population has had at least one dose. Hence, as billions more are inoculated, global confidence should rise — and investors thrive on improving positivity.
Economic recovery is underway
Last year saw the steepest and deepest economic contraction since the Great Depression of the 1930s. As restrictions and lockdowns were imposed across the world, economic contraction was severe. But with societies reopening and moving to a ‘new normal’, economic indicators are looking up. Indeed, global GDP (gross domestic product) might rise by as much as 6% in 2022 (but slightly lower in 2022). As economic growth rallies, consumer confidence should return. This should push up consumer spending, which spells good news for share prices.
Improved earnings support higher share prices
In the event of a sustained, multi-year economic rebound, strong company earnings growth should resume. After 15 months of intermittent lockdowns, there’s a huge amount of pent-up consumer demand. Typically, sectors that have suffered most — such as travel & leisure, entertainment, and consumer discretionary goods — bounced back hardest after previous recessions. As growth surges, this boom could lift share prices of cyclical and value stocks. And stronger earnings growth should support current share prices and perhaps lift them to new heights.
Now for the bad news
Personally, I don’t expect everything to go perfectly, because it never does, right? There will be plenty of hard bumps in the road to higher share prices, especially if more highly transmissible coronavirus variants emerge. That’s why I’m braced for a period of heightened volatility, where stocks yo-yo around as the future unfolds. But if stocks do fall, then I’ll be ready to buy shares in good companies at fair prices once again!