2020 is in the books, and as terrible as it was for people generally, the stock market did far better than most would've expected during the worst pandemic in a century. Yet Wall Street isn't starting 2021 on a particularly good foot. As of 11 a.m. EST, the Dow Jones Industrial Average (^DJI +1.24%) had fallen 483 points to 30,124. The S&P 500 (^GSPC +1.46%) had dropped 53 points to 3,703, and the Nasdaq Composite (^IXIC +2.02%) had declined by 161 points to 12,727.
Declines of 1% hardly qualify as a plunge, but for many big-name stocks, the beginning of the year is far harsher. Consider how some of these top performers are starting out 2021:
- Electric-vehicle battery specialist QuantumScape (QS +9.50%) is down 35% Monday morning, after having nearly quadrupled in a month and a half following its coming public through a special purpose acquisition company merger.
- Other EV stocks are getting hit as well, including a 13% drop for XL Fleet (XL +0.00%) and a 12% decline for Blink Charging (BLNK +18.82%).
- In the software-as-a-service realm, low-code specialist Appian (APPN +2.02%) rose 324% in 2020, but it's down more than 9% this morning. Similarly, top performer CrowdStrike Holdings (CRWD 1.79%) is down more than 6%.
It's easy to conclude that the best of times are over for these stocks and that 2021 will bring a much different environment to the stock market. Yet there are actually a few reasons why investors shouldn't be surprised at seeing market leaders fall to begin the new year.
Image source: Getty Images.
1. Traders are taking profits while putting off taxes
Many shareholders invest in taxable accounts, in which they have to pay capital gains taxes on profits. Taxpayers have to report these gains on their tax returns for the year in which they sell, and the taxes are due in most cases on April 15 of the following year.
If investors had sold their shares last week, then they would've had to include the gains on their 2020 tax returns. That would've meant paying tax in just over three months.
By waiting until early January, however, investors get to put off paying their taxes for a full year. Given how far stocks like QuantumScape, XL, and Appian had risen, making at least partial sales to free up cash for other opportunities could be a smart portfolio move -- and waiting until now to sell was a much tax-friendlier way to do it.
2. Geopolitical and economic worries are rising again
The bull case for 2020 hinged largely on a narrative that included a rapid recovery from the COVID-19 pandemic. Moreover, many on Wall Street were pleased with the results of the 2020 elections, with an apparently divided government making it likely that the status quo on key issues like corporate taxation and regulation will continue.
However, market participants are seeing things they don't like. The coronavirus vaccine program hasn't rolled out nearly as quickly as anticipated, setting the stage for potentially longer disruptions to the economy in 2021. Meanwhile, contentiousness in Washington has some wondering whether two key Georgia runoff elections might swing the balance of power to the Democratic Party in the U.S. Senate.
Why you can safely ignore a one-day drop
Nobody likes to see their portfolios lose value, especially at the beginning of what they hope will be an auspicious year. However, nothing has happened that represents a fundamental shift in the prospects for the businesses whose shares you own.
In particular, long-term investors can exploit the tax planning moves that short-term traders make. Taking advantage of dips in stock prices to add to their favorite positions is a time-honored move.
Obviously, there's no guarantee that the stock market will keep rising to new records in 2021. However, don't let a single day of sharp stock market declines cause you to sway from your long-term investing strategy. Staying with your plan is the best way to ensure the best results in the coming year.
