After plunging to depths unseen in the last 30 years due to the pandemic, the S&P 500 index has made an astonishing comeback in 2020. The index has surged by over 50% since its low of 2,237 in March 2020 and is now closer than ever to break the 4,600 mark before year end.
This feat is a remarkable achievement by the market as it took just 9 months to restore the index to its pre-COVID levels. The bull market is driven by expectations of vaccine availability, the Federal Reserve and other central banks’ steady monetary stimulus, and the government’s fiscal package. Many investors believe that the stock market is heading for an all-time high before the year ends, and this is fuelling the optimism on Wall Street.
Surprisingly, the cyclical sectors of the market which were most affected by the lockdown measures are now the leading gainers in the index. Airlines, banks, casinos, and cruise lines, these companies will probably reinstate profits in 2021. However, they still remain undervalued compared to their pre-COVID levels, implying that there is still room for upside potential in the market. Furthermore, technology stocks remain at the forefront as investors continue to bet on the tech growth story.
At this juncture, the S&P500 needs to break the daily resistance at 4590 and close above this level to reach its next milestone of 4600. Most technical analysts, however, suggest that the S&P500 needs to close at least 5-10% higher than the current levels to maintain the continuing uptrend. Moreover, if the index clears the 4600 mark before the year-end, then we may very well expect new record highs in 2021.
Nonetheless, there are other factors that need to be taken into consideration. Despite the ongoing recovery, the COVID-19 crisis is still far from over. The effectiveness of the fiscal and monetary stimulus will become evident in 2021 and any developments on this front could have a material impact on stock prices. Also, the US election results and the US-China geopolitical tensions could trigger further volatility in the markets.
In conclusion, it is difficult to predict what heights the S&P500 can reach by the end of the year. However, if the vaccine comes out as expected and the economic data continues to conform to expectations, then the S&P500 should push past 4,600 before the year-end.