This year has featured a little bit of everything. During the first quarter, the broad-based S&P 500 (^GSPC -0.06%) plunged into bear market territory faster than ever before. The ensuing eight-plus months brought a ferocious snap-back rally. When the checkered flag waves in a little over two weeks, we might be looking at gains well above historical norms.
Can we expect a repeat performance in 2021?
With the S&P 500 sitting at 3,663 as of mid-December, it would only take a roughly 9% move higher to hit the psychologically important 4,000 level. It's plausible that the S&P 500 might really reach 4,000 in 2021, especially with the following five catalysts in the market's sails.
Coronavirus vaccines offer promise
All eyes are on a handful of coronavirus disease 2019 (COVID-19) vaccines. Both the Pfizer (PFE -0.65%)/BioNTech (BNTX -1.17%) vaccine (BNT162b2) and Moderna's (MRNA -1.99%) mRNA-1273 delivered jaw-dropping vaccine effectiveness (VE) in late-stage trials.
The Pfizer/BioNTech VE came in at 95%, with Moderna's vaccine close behind with a VE of 94.1%. Researchers had expected VEs closer to those of typical annual influenza vaccinations (i.e., 50% to 60%).
This past weekend, the Food and Drug Administration gave emergency use authorization to the Pfizer/BioNTech vaccine. The agency is widely expected to do the same for Moderna's COVID-19 vaccine candidate soon.
Whether life returns to normal quickly hinges upon how many people are willing to get the vaccine. A Pew Research survey from September showed that only 51% of those polled were leaning toward getting the vaccine. This level would be too low to stop the pandemic. Vaccine participation will be key in the S&P 500's performance.
The Fed will fuel investment
The nation's central bank will also play a key role in pushing the S&P 500 toward the 4,000 level.
The Federal Reserve uses monetary policy to influence the U.S. economy, business activity, and consumer behavior. It most frequently employs the tactic of raising or lowering the federal funds rate -- i.e., the overnight lending rate that banks charge each other. The Fed doesn't directly change interest rates, but its actions trickle down and affect everything from credit card interest rates to mortgage rates.
The Fed's pledge to keep its fed funds rate at or near historic lows through 2023 is akin to holding a match above gasoline. Growth stocks are going to have free rein to borrow at historically cheap rates in order to expand, innovate, and even acquire.
Washington gets down to business
Capitol Hill could be the wildcard that sends equities higher in 2021.
For the past five months, the Democrat-led House of Representatives, Republican-led Senate, and Trump-led White House have made no headway on a new coronavirus stimulus package. Nothing's been done on the stimulus front since late March. That's a problem because small businesses and working Americans are hurting.
However, a new Congress will begin on Jan. 3, 2021, and President-elect Joe Biden will be sworn in as the 46th President of the United States on Jan. 20. I'm not suggesting that anything will get done on Day One, but there will be plenty of incentive to reach a stimulus agreement quickly. Additional stimulus to support ailing industries, small businesses, and struggling workers would be a major positive for the backbone of the U.S. economy: the financial sector.
All eyes on Georgia
The Jan. 5 Georgia runoff election for two U.S. Senate seats is going to have major implications in Washington, D.C.
The S&P 500 has done so well since early November because the election largely went as Wall Street expected. The market has never been a fan of surprises. Investors believed that Republicans would retain control of the Senate, resulting in a divided Congress. Biden's presence in the White House should lead to more fiscal predictability, and a split Congress would halt any big-picture policy proposals in their tracks. This includes Joe Biden's tax plan, which would increase the peak marginal corporate tax rate to 28% from 21%.
At the moment, the GOP holds 50 Senate seats, while Democrats hold 48 (this figure includes Independents). If a Republican wins just one of the remaining two seats in Georgia, major policy measures will almost certainly be off the table for two more years. Wall Street and corporate America would appreciate that outcome.
History is on investors' side
Finally, don't forget about history.
The S&P 500 has undergone a stock market correction of at least 10% every 1.84 years since 1950. It has also hiccupped between 5% and 9.9% with even greater frequency. Still, the benchmark index has returned an average of 8.12% annually over the trailing 30-year period (10.52% annualized, if you factor in dividends paid). If the S&P 500 simply delivered this historic return in 2021, it would just about put the index on track to end the year at 4,000.
Admittedly, a lot will need to go right for historically pricey equity valuations to march even higher in 2021. But if even half of these catalysts come to pass, the S&P 500 might hit 4,000 in the upcoming year.