A truly wild year on Wall Street is about to come to a close -- and it'll unbelievably be on a high note. Following a train wreck in the first quarter that saw the benchmark S&P 500 lose over a third of its value in a month, the broader market has spent much of the past nine months in rally mode. When we officially cross the finish line in four days, it'll probably be with the S&P 500 higher by a double-digit percentage.
However, tenured investors know all too well how fickle the stock market can be. Crashes and stock market corrections are a normal occurrence, and they represent the price of admission to the greatest wealth creator on the planet. Come January 2021, it's quite possible the investment community could witness yet another stock market crash.
Here are four potential catalysts that could roil equities early in the New Year.
1. Johnson & Johnson's COVID-19 vaccine fails to live up to the hype
At some point in January, the largest publicly traded healthcare stock in the U.S., Johnson & Johnson (JNJ 1.01%), is going to release interim data on its late-stage clinical trial involving JNJ-78436735 as a treatment for the coronavirus disease 2019 (COVID-19). In a phase 1/2a analysis, Johnson & Johnson's vaccine candidate generated neutralizing antibodies in 98% of participants.
To date, two vaccines -- Pfizer's (PFE 0.52%) and BioNTech's (BNTX -0.92%) BNT162b2 and Moderna's (MRNA 0.98%) mRNA-1273 -- have been granted emergency use authorization (EUA) by the U.S. Food and Drug Administration. These EUAs were granted after the Pfizer/BioNTech and Moderna vaccines delivered respective vaccine efficacy of 95% and 94.1%.
However, Johnson & Johnson's treatment holds one key advantage: it's administered in a single dose, as opposed to two doses with the EUA-approved vaccines. If the J&J treatment were to yield similar efficacy as BNT162b2 and mRNA-1273, it would provide an even quicker inoculation option. But if J&J's treatment fails to live up to the hype of high expected efficacy, we could see short-term sentiment in the market shift notably negative.
Suffice it to say, a lot is riding on what Johnson & Johnson has to say next month about its COVID-19 vaccine.
2. Vaccine production/distribution challenges rear their head
A lot is also riding on the production and distribution of the two EUA-approved vaccines.
Moderna has partnered with Lonza Group to handle the manufacturing of its vaccines. What's unclear is if Lonza has the anywhere near the capacity to produce the amount of vaccine Moderna would like to distribute in 2021.
As for Pfizer/BioNTech, production isn't much of a concern. Rather, it's the transportation of its vaccine, which needs to be cold-stored at close to minus 100 degrees Fahrenheit (F). Most pharmacies and hospitals don't have freezers capable of reaching these temperatures, meaning off-the-cuff solutions (e.g., dry ice) have been needed to get this vaccine from point A to B.
The issue is that Wall Street has been counting on this process (manufacturing, distribution, and vaccination) to go off without a hitch, and that's highly unlikely to happen. As of Dec. 23, the Center for Disease Control and Prevention noted that 1,008,025 people had received a vaccination, which is well shy of the goal of administering the vaccine to 20 million people in December.
If hiccups continue to arise, COVID-19 could sink the market come January.
3. A surprise in the Georgia Senate runoffs
While it's always best to avoid mixing investing with politics, fiscal policy can absolutely have an impact on corporate America. That's why two U.S. Senate runoffs from the state of Georgia hold so much interest.
Following the Nov. 3 election, we know that Democrat Joe Biden will be sworn in as the 46th president of the United States on Jan. 20. We also know that Democrats maintained a slim majority in the House of Representatives. As for the Senate, Republicans won 50 seats, with the combination of Democrats and Independents taking 48 seats. The remaining two seats are up for grabs in Georgia.
If just one of the two remaining seats in Georgia were to be won by the GOP candidate, Republicans would maintain a party-based majority in the upper house of Congress, and would likely halt any big-picture policy proposals introduced by Biden. This would almost certainly include increasing the peak marginal corporate tax rate to 28% from 21%.
But in the event that Democrats win the Jan. 5 runoff elections, the Senate would effectively be tied. Votes that end in a 50-50 tie in the Senate are broken by the vice president, which in this case will be Democrat Kamala Harris as of Jan. 20.
In other words, Wall Street is counting on a divided Congress and ongoing gridlock. If the Democrats win on Jan. 5, Biden's corporate tax hike, which could lower operating earnings for public companies by about 10%, would be back on the table. That would not make investors happy.
4. Additional stimulus talks fall on deaf ears
Investors are also counting the new Congress and Biden administration to quickly tackle another round of fiscal stimulus.
Last week, Congress finally agreed on an $892 billion coronavirus relief package after roughly five months of contentious debate. This bill, assuming it's signed by President Trump, provides $284 billion to the Paycheck Protection Program, adds $300 extra each week to federal unemployment benefits through mid-March, allocates capital for the distribution of COVID-19 vaccines, and provides up to $600 stimulus payouts to over 100 million taxpayers.
Yet Wall Street is expecting an even larger stimulus bill to come out of Washington once Biden is in office. Though expecting a bill within days of Biden taking the helm might be a bit ambitious, investors will be looking for tangible evidence that lawmakers are taking steps forward in crafting the next round of fiscal stimulus. The thing is, if Republicans maintain control of the Senate, Majority Leader Mitch McConnell (R-Ky.) would probably make the next round of discussions even more challenging than what we've witnessed over the past five months.
If the idea of a larger fiscal stimulus falls on deaf ears in late January, it could send investors running for the exit.