The first half of 2021 is now behind us. And to get an idea of where the stock market is going, we must first reflect on where it has been.
At the end of last year, I made four big predictions for 2021.
- A devaluation in the U.S. dollar will spark a stock market rally.
Who wasn’t a dollar bear coming into this year? The government was handing out money left and right, and interest rates were near all-time lows.
Although the U.S. Dollar Index (DXY) didn’t reach my low-$80s target price, it has shown weakness, hovering between $89 and $92.
The stock market rallied nonetheless. The S&P 500 Index currently stands at 4,385, well above my 4,300 target for the end of 2021.
Growth stocks were a nonfactor for the bulk of the rally. In fact, S&P 500 value stocks were outperforming S&P 500 growth stocks by a ratio of 5-to-1 until mid-May.
But money is now piling back into growth stocks. So much so that growth is now outperforming value on the year.
With the growth trade back in play, I am now revising my year-end target for the S&P 500 from 4,300 to 4,700.
The S&P 500 Will Hit 4,700 This Year
(Source: Bloomberg.)
The Next 6 Months Will Be Exciting
- Biotech stocks will lead the market.
Right out of the gate, biotech stocks were running hot.
The Nasdaq Biotech Index rallied 15% before reversing in early February. This was around the time the market started getting spooked by a rise in inflation.
But money is flooding back into the sector as investors have gotten excited about recent breakthroughs.
Investors Are Pouring Money Into Biotech
(Source: Bloomberg.)
Biotech company Intellia reported promising data from its revolutionary CRISPR trial. The innovative technology has now been administered directly inside the human body.
The Food and Drug Administration approved Biogen’s Alzheimer’s drug, marking the first approval for an Alzheimer’s therapy in over 17 years.
More developments will unfold to end the year, and I expect the biotech sector to stay hot as they play out.
- Chinese stocks will outperform U.S. stocks.
The market favored Chinese stocks to start the year, and they rose 10% by mid-February.
But China’s government threatened some of its nation’s biggest companies, causing Chinese stocks to crater over the following months.
Chinese Stocks (Purple) vs. U.S. Stocks (Black)
(Source: Bloomberg.)
Although Chinese stocks are slowly rebounding, I expect gains to be slow unless the government eases its scrutiny on technology companies.
We all know the Chinese government is unpredictable, so it’s impossible to know exactly when this will occur.
- Small-cap stocks will outperform large-cap stocks.
U.S. small-cap stocks started the year strong, gaining 20% through mid-March. At that point, they were outperforming large caps by a ratio of 3-to-1.
Small caps have since consolidated, and large caps have made up ground, putting the two groups neck and neck.
Small Caps (Purple) vs. Large Caps (Black)
(Source: Bloomberg.)
But I expect small caps will outperform to end the year, in part thanks to the rise in retail investing.
According to Goldman Sachs, retail trading activity has doubled since 2016 and now accounts for about 20% of total U.S. stock trading volume.
And what do retail investors buy? Small caps.
Institutions generally have size limitations, which prevents them from taking significant stakes in smaller companies. This leaves retail investors to control the market.
With more retail trading activity, small caps will soar.
I’d say my top predictions for 2021 are panning out nicely. But we have a long way to go before the end of the year, and anything could happen.
So, make sure you continue to follow our daily insights to learn about the market’s profit opportunities as they arise.
Regards,
Research Analyst, Strategic Fortunes