Will There Be a 2021 Stock Market Crash? Here Are the Reasons

TL;DR

A 2021 stock market crash is unlikely due to three main factors: projected economic growth of 5% in the US and 6% globally, households holding an estimated $2.2 trillion in excess cash, and ongoing stimulus measures. However, investors should prepare for potential market corrections, particularly in high-beta stocks, as money flows towards cyclical and value stocks.

Transcript

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Key Insights

• ❓ Economic growth projections of 5% in the US and 6% globally provide a positive outlook for stocks and reduce the likelihood of a market crash.
• 🥹 Household holdings of $2.2 trillion in excess cash suggest a potential economic boost, preventing a market crash.
• 🔬 A rotation from growth to cyclical and value stocks indicates changing investor preferences and can create the perception of a crash for those heavily invested in growth stocks.
• ✋ High beta stocks are vulnerable to larger declines, potentially contributing to a crash-like situation for investors heavily invested in these stocks.

Questions & Answers

Q: Was a 2021 stock market crash considered likely?

The outlook presented was that a stock market crash was unlikely in 2021. The three supporting forces were projected economic growth, $2.2 trillion in excess household cash, and continued stimulus measures.

Q: Why were investors worried about a stock market crash?

The market fell 2.5% during the week, while the Nasdaq dropped 4.5%. The Nasdaq also recorded its worst single day since October, and many investors reported substantial red in their portfolios.

Q: How could economic growth reduce the likelihood of a market crash?

Economic growth was projected at 5% in the United States and 6% globally. The projected US growth represented approximately $1.1 trillion added to the economy, supporting the outlook for earnings and consumer spending.

Q: Why was $2.2 trillion in excess household cash important?

Households were estimated to hold $2.2 trillion in excess cash. Spending that money could support economic growth, corporate earnings, and asset prices, making a broad market crash less likely.

Q: How could continued stimulus help prevent a crash?

Continued stimulus was identified as one of three forces supporting the market. Alongside economic growth and excess household cash, it contributed to the case that investors could buy selected stocks during the decline and still perform well by year-end.

Q: Why could high-beta stocks feel like they are crashing?

High-beta stocks are more volatile than the broader market and can move more sharply in either direction. During a market decline, their larger losses can create a crash-like experience for investors heavily concentrated in them.

Q: How could a rotation from growth to cyclical and value stocks affect investors?

Investor preferences could rotate away from growth areas such as technology and consumer discretionary stocks toward cyclical sectors such as energy and financials. Investors concentrated in growth stocks could therefore experience severe losses even while cyclical and value stocks perform better.

Q: Which market sectors rose or fell during the week discussed?

Energy was the only sector shown as positive, rising 4% for the week. Consumer discretionary and utilities each fell 5%, while technology declined 4%.

Summary & Key Takeaways

• The market experienced a significant decline last week, with the Nasdaq dropping 4.5% and the worst single day since October, raising concerns of a potential crash.

• However, there are three reasons why a crash is unlikely: projected economic growth of 5% in the US and 6% globally, households holding $2.2 trillion in excess cash, and continued stimulus measures.

• Investors should be aware that a market correction may still occur, especially for high beta stocks and in the event of a rotation from growth to cyclical and value stocks.