In 2020, we had a global pandemic, a hotly contested election, a vaccine, and a stock market that seemed determined to rise while the world held its breath. But the first part of the year and its final quarter were very different for all of us.

The Haves and the Have Nots Bounce Together

Until November, the market had clearly separated companies who benefited from the work-from-home, limited activity environment of the pandemic — web-based shopping platforms, entertainment streaming services, and web-based conference calling services — and those who could not operate effectively in it — airlines, cruise lines, and hotels—businesses that required person-to-person contact and had high fixed costs in rent, employees, etc.

However, once positive vaccine results started to emerge, the market began to change dramatically. Now the companies that suffered during the pandemic began to lead, albeit from depressed levels. We went from a have-have not situation to one in which a broader selection of companies participated in a Q4 recovery rally.

Even the small caps of the Russell 2000, who had been underperforming for the past three to four years, began to outperform and, in fact, had their best quarter ever in Q4 with a rise of over 30 percent in value.

Key Positive and Negative Factors to Watch

Is the Q4 recovery and rally sustainable? Here are factors we think are important to watch:

Potential Positive Factors

• Improving earnings in large and small companies — likely over the next 1-2 years
• Interest rates remaining relatively benign — expected, the Fed seems committed
• Stimulus package — passed
• Inflation remaining relatively under control
• Quality of IPOs remaining high
• Cash levels remaining high

Potential Negative Factors

• A negative turnaround of any of the positive factors — rising interest rates, declining earnings, etc.
• Logistical problems in delivering the vaccines
• A crash in investor enthusiasm

2021 Stock Market Outlook — Sunny and Mild with a Chance of Intermittent Showers

Looking at all of the factors, Douglas S. Foreman, Chief Investment Officer of Kayne Anderson Rudnick, believes the market is likely to generate positive returns over the next few years, although they may moderate from current levels. S&P 500 returns may average in the 5-10 percent range.

That said, there may be corrections along the way, especially due to a cooling of investor sentiment. The market has been bullish, which is usually a contrary indicator because it’s hard for anyone to keep bouncing along for long without a rest. Still, temporary corrections are an inevitable part of equity investing, and we believe the stock market remains the most attractive place for investors to find good returns today.