A global pandemic, widespread lockdowns, a crippling recession and high unemployment characterise what should have been a quiet 2020.

Yet, in the grips of one of the worst crises in modern history, the stock market paints an entirely different picture – one of buoyancy and hope. After all, markets are forward looking and price what will be and not what is. If anything, investors seem rather optimistic that the worst is behind us and that the economy will bounce back robustly in this new year.

To some degree, their optimism is warranted as vaccines – the only solution for a health crisis – have been discovered. And in record time at that. Indeed, 2020 will be remembered not only for all the economic pain and suffering that the virus has wrought, but also for the accomplishments of tireless scientists who delivered hope to a world quite literally struggling to breathe.

Hope and optimism continued to lift markets to record highs on the last trading session of 2020, albeit with thin trading volumes. The passage of the Covid-19 relief bill and the rollout of vaccines continue to bolster expectations that economic recovery will come swiftly after these dark winter months.

The S&P 500 index notched its 33rd record close of 2020, up more than 16% for the year. The index rose 68% from March lows, buoyed by trillions of dollars in fiscal and monetary stimulus and speedy progress in vaccine development and distribution. The Dow Jones Industrial Average is up 7.3% for the year while the tech-heavy Nasdaq Composite Index gained a hefty 43.6% in 2020 for its best yearly performance since 2009.

Indeed, tech stocks were the biggest winner in 2020, ending a turbulent year on a rather high note as the pandemic boosted stay-at-home winners and accelerated the shift towards digital. Majority of the gains were led by Apple, Facebook, Amazon.com, Netflix, Microsoft and Alphabet which surged as the stay-at-home trade gained traction on the back of widespread lockdowns as people all over the world hunkered down in their homes to avoid infection. Still, lofty valuations and seemingly over-optimistic projections for both the tech sector and more growth-sensitive stocks remain a concern for some investors.

Investors have also been particularly encouraged by China’s economy, which continues to motor ahead after the country largely contained the coronavirus. Investors hope that with the discovery of the vaccines, the US and European economies will play catch up. Nevertheless, even with the pandemic worsening in those regions, economic data have remained largely steady, with the rollout of vaccines giving consumers and businesses more confidence in the new year.

Source: OCBC Research - 4 Jan 2021