The markets saw an unprecedented year in 2020. The Covid-19 pandemic may have been the primary driving force, but it shouldn’t be considered the only factor. Many trends have really taken shape this year in terms of the valuations markets will assign to companies seemingly lacking fundamentals, yet rich in potential. And such factors figure heavily into broad markets. Because it’s an exchange-traded fund (ETF) tracking 500 large U.S. companies, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is a fair reflection of those aggregate trends and investor sentiment. Therefore, for investors considering investing in a bet that broad markets will rise, SPY stock may be a fine place to park their money.
Thus, readers will want to know what broad macroeconomic factors are set to drive those 500 large companies in 2021. Will the net effect lead to markets pitching downward or upward? There’s a lot to consider, so let’s get into it.
I’m not referring to social distancing or work from home when I question the new normal. Rather, I’m referring to markets which rise seemingly on very loose catalysts. 2020 has seen stocks rise based on very little. Is this a trend that will continue? I believe it very well may. At the same time, do I believe that there is a correction on the horizon? The answer is absolutely.
While I believe that SPY stock is going to rise as a broad proxy to the markets, I foresee it reversing. So when might that happen?
My guess is that markets are going to continue to rise at least through the middle of 2021. In all likelihood, we’re looking at a good portion of this year looking like 2020 in terms of day-to-day living. That means consumers and investors are going to look at stocks as weakened but as good bets to rebound when we return to normal. Which means SPY shares should continue to rise.
I see a reckoning occurring some time late this year once we get back to normal life. Then companies are going to have to deal with the aftereffects of the pandemic and the effects on their balance sheets. I assume that there will be some degree of market correction at that time. After all, many large companies have eaten losses through 2020.
These will be digested and become evident in later quarters this year. Companies won’t be able to assume a post-pandemic market rebound once the pandemic has ended. Because, despite the optimism, companies, like people, are suffering still.
At some point the economy will reflect those fundamental truths of how much damage the pandemic dealt. Inflated price-to-earnings (P/E) ratios and market capitalizations are going to drop then. Coincidentally, SPY stock will decrease in kind at that time.
Back to Valuations
I intimated that fundamentals have gone out the window in terms of equity valuation. This has been glaringly evident in a few areas of the markets. Specifically, I’m referring to electric vehicles (EVs) and special purpose acquisition companies (SPACs).
Both EVs and SPACs have been important to the market narrative for 2020. They’re also areas of the market which tend to carry high valuations relative to revenues and earnings.
Tesla (NASDAQ:TSLA) has been on an incredible tear through 2020. Tesla shares traded at $95.63 on Jan. 10, 2020. A year later while I’m writing this they’re sitting around $834. It’s an awe-inspiring story in many ways. TSLA stock has risen 772% in a year.
But it is also difficult to rationalize that Tesla shares carry a P/E ratio of 1,550. Put another way, you’ll pay a lot of money to own a piece of Tesla’s earnings.
SPAC offerings have similarly seen high valuations despite what in many cases are companies without revenues. Both EVs and SPACs are overvalued in my opinion. Yet investors don’t seem to care. I’m beginning to wonder if this is just the precipice of a new investing paradigm. One in which investor capital backs companies that fit broad narratives like environmental friendliness but are fundamentally flawed.
SPY stock is the looking glass that answers that question with a resounding “yes.”
Verdict on SPY Stock
I believe SPY stock is simply going to continue to rise while we remain in the pandemic. Are the markets inflated? I think so. Are they due for a correction? Yes, I believe so. But the important thing is to time that correction and to play the markets around that.
Succinctly I’d suggest that stocks in aggregate are going to continue to be overvalued until we have a reality check. I believe that reality check will come in the form of earnings reports that are released in Q3. Q1 and Q2 earnings and revenues will look like those throughout 2020, because we’ll still be in a pandemic.
Investors are going to continue to chase stocks, because they believe they must rise once we’re out of the pandemic. Q3 is going to provide an accurate assessment of what the pandemic has done. So I believe SPY stock is a buy and won’t drop until Q3.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”