Why is the stock market falling and what you can expect for 2021

Yesterday, the market sentiment suddenly took a turn for the worse — sending global stocks down. If you took a beating in your portfolio yesterday, you’re not alone.

What’s the big deal? Over the past year, the economy has teetered between bullish sentiments (markets reopening, vaccination) to bearish one (rising inflation, COVID variants).

Today, the bears are taking over again with fears of a COVID delta variant and ongoing inflation pressuring the stock market. Plus, several other risks (via BBG):

• Growth expectations are still too high, and consumers are saving more than they spend — Ruchir Sharma of Morgan Stanley
• Rising prices are slowing down consumer spending — George Saravelos of Deutsche Bank

Looking forward: With no end in sight to these risks — vaccinations are plateauing in the US, inflation is still trending up and consumer spending is still fragile — strategists’ have diverging forecasts:

• Some see the fall as a pullback in areas of the market that got too hot (i.e. cyclical stocks) or normal volatility during the summer season.
• Others see this as “peak growth” and reduced their portfolio allocation into risky assets.

Looking back at history, data shows in the years after the stock market rises more than 50% (i.e. 2020), the stock market tends to be down 1.5% (i.e. 2021).

• The good news: the market was up 42.4% after 3 years.
• Even better news: the market was up 65.6% after 5 years.

Meaning: Based on historical data from the past 70 years, the market has a good chance of being down this year — but look past it for brighter returns.

Over the next couple of weeks, corporate earnings reports will give investors a better idea of the state of the economy — and the direction of stocks.