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2021 Predictions: The Election is over. Vaccines are Here. What Could Go Wrong?

December 23, 2020

Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

2020 will no doubt be seen as one of the most eventful years in modern history. There were 10.7 million people unemployed in the U.S. as of December 1st, more than double the 5 million from the record-low unemployment rates seen last February. The fortunes of 2021 will certainly hinge on the effectiveness of COVID-19 vaccine rollouts, along with fiscal stimulus. All this comes with a new White House administration taking control on January 21st. Here are some predictions for 2021.

In fact, data collected by FactSet, showed that in November 464 stocks in the S&P 500 ended positively for the month. That’s the second highest for the year, right behind April’s recovery of 478 stocks. After a relatively slow September and October, economists are optimistic that the trend of growth will continue into December.

So what could go wrong, right? Given the plethora of known unknowns—specifically how well, or poorly the rollout of the vaccines will work and who will take control of the Senate—Wall Street analysts have put forward a variety of predictions for the coming year. With that in mind, let’s take a look at a few of the most prominent predictions at play right now and what they might mean for Direxion’s stable of leveraged funds.

The Moderate View

Of course, the most prominent take on what is likely in store for the broad market in 2021 is that stocks will maintain an average rate of growth, with the S&P putting up between 10-14%, in line with the average rate over the past decade.

This is the view shared by analysts with UBS, Jefferies, BMO, Credit Suisse, with the main thesis underlying their predictions being the gradual success of the COVID-19 vaccines over the initial months of the year and an extremely accommodative environment for companies and borrowers supporting accelerated growth in the back half of the year.

Among the more specific market calls coming from this contingent are those from UBS’s Keith Parker  and Jefferies strategist Sean Darby, both of whom single out industrial stocks and industries with exposure to consumer cyclicals, which stand to benefit from strong relative growth over their performance through 2021.

However, the two were split on other industries like utilities and materials, with Darby arguing that a cheaper U.S. dollar will support commodities and raise operating margins through 2021 while Parker predicts a stronger rotation toward growth, underweighting other value sectors like real estate and consumer staples.

This bodes well for the Direxion Daily Industrials Bull 3X Shares (DUSL), which has seen strength in the waning days of 2020. Meanwhile, if UBS’s call is to be believe, the Daily MSCI Real Estate Bear 3X Shares (DRV) could see stronger momentum as corporate and residential REITs struggle in the post-COVID economy.

The Bull Case

Of course, while the moderate case is the most prevalent, the more compelling argument for the majority of traders is the bull perspective on offer from analysts representing Goldman Sachs and JP Morgan.

At the moment, the latter’s assessment is by far the strongest. JP Morgan analyst Dubravko Lakos-Bujas is predicting 26% growth through the year as business and Wall Street see massive benefits thanks to easy borrowing and high liquidity justifying even higher valuations. And, in stark contrast to the moderate view, Lakos-Bujas sees much of the growth occurring in the first half of the year thanks to fewer disruptive events emanating from the new Biden administration.

A slightly more moderated view of a bull run in 2021 comes from David Kostin with Goldman Sachs, who anticipates roughly 16% growth built on the same secular growth elements pointed at by JP Morgan. However, the prediction also carries more caution early in the year, with the market’s current high valuations still at risk of being upset by the persistence of the pandemic. For the less trading-oriented buy & hold investors perhaps a more prudent strategy, like hedging with Direxion’s Daily S&P 500 Bear 1X Shares ETF (SPDN), or doubling down on the work-from-home culture with the Direxion Work From Home ETF (WFH) may come to mind.

Despite their differences, both bullish calls predict further growth in high-yield sectors like technology and healthcare companies, a thesis that supports the Direxion Daily Technology Bull 3X Shares (TECL) and the Direxion Daily Healthcare Bull 3X Shares (CURE).

The Bear Case

Finally, the bear case — or least optimistic case —which come from Morgan Stanley and Bank of America analysts. They share the perspective that much of 2021’s potential growth is already priced into the market.

Bank of America Strategist Savita Subramanian is the most caustic about the prospects for 2021, anticipating only about 5% growth through the year. She sees the lingering fallout of the pandemic and delayed stimulus as the main point of resistance for equity. However, she also admits that, with interest rates low and inflationary risks high, the stock market is still one of the most compelling investment opportunities available.

Coming in with a slightly higher estimation is Morgan Stanley’s Michael Wilson, who sees about 8% growth for the S&P 500. While still a solid pace, Wilson believes value will yield the most consistent growth and, like Subramanian, he calls out the potential for higher rates as businesses return to full capacity.

All told, these forecasts highlight the potential for the post-COVID rebound to include inflationary pressures that could mitigate growth while benefiting safety sectors represented by ETFs like the Direxion Daily Financial Bull 3X Shares (FAS), the Daily Regional Banks Bull 3X Shares (DPST) and the Daily Utilities Bull 3X Shares (UTSL).

Where Else Is There To Turn?

Although the analysts’ opinions on what the next year may hold is diverse, the coming months will no doubt set a tone for what 2021 could likely hold, at least for the stock market.

The market certainly set its own tone through 2020. Even in the face of a devolving public health crisis, partisan turmoil in Washington, the persistent economic struggles of Main Street businesses and the shrinking middle class, the stock market surged to new highs. And while the real world may buckle under these concerns, Wall Street is not the real world, and it bends to different whims.

More than anything else, traders and investors should view the analyst predictions presented above through that lens.

Here’s wishing you all a Save, Healthy and Happy Holidays.

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Market Disruptions Resulting from COVID-19:  The outbreak of COVID-19 has negatively affected the worldwide economy, individual countries, individual companies and the market in general. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Market Disruption Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to investment in micro-cap, small- and/or mid-capitalization securities. Investing in micro-capitalization companies are significantly more volatile as they face greater risk of business failure than companies considered small and/or mid-capitalization companies. Investing in small and/or mid-capitalization securities involves greater risks and the possibility of greater price volatility than investing in larger, more-established companies. Additional risks include, for the Direxion Daily Small Cap Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily Small Cap Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk, and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

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