2021 Opens With a Bang for Investors

It was a wild ride for Wall Street last year, with the coronavirus pandemic sending both economies and financial markets into turmoil. But despite the collapse of share prices in March and February, the US stock market ended the year on a record high.

Many people are now hoping the worldwide rollout of vaccines and ongoing government stimulus packages will also have a positive impact on equities.

It was also a tumultuous year for the US dollar, which weakened against the world’s major currencies. This year looks set to be more of the same, with many analysts expecting the currency to spiral further as investors look for safer assets to hedge against a turbulent economy.

Bitcoin’s recent rally, in which it surged to a record high, is also tempting investors. But while this may conjure up memories of previous rallies, could things be different this time around?

Listen to the latest Digest & Invest Podcast to hear eToro market analyst Henry Ward discuss what’s been happening with Bitcoin, S&P and USD.

Bitcoin rally

Bitcoin’s value is on another rollercoaster ride, soaring to a new record high less than three weeks after breaking $20,000 for the first time.

After rocketing in value by more than 300% last year, Bitcoin began this year strongly, smashing through the $30,000 mark. It then reached a new high on its twelfth anniversary, surging past $34,000 for the first time before crashing below $30,000, highlighting just how volatile the cryptocurrency can be.

The rally is similar to the one at the end of 2017, when the value of Bitcoin rocketed from $1,000 to the giddy heights of $17,000 before tumbling down to around $4,000 later in 2018.

One major difference this time though, is that Bitcoin could finally be on its way to gaining mainstream acceptance.

Financial institutions are showing a growing interest in Bitcoin, with proponents of the cryptocurrency saying it offers a hedge against inflation and a weak US dollar, similar to gold.

In October, PayPal said that it would allow customers to buy, sell and use the cryptocurrency for the first time. Some analysts argue that PayPal’s adoption of the currency could give this rally more staying power than the one of three years ago, which was mainly fueled by speculation.

S&P hits record high

The S&P 500 kicked off 2021 at a record high in the first trading session of the year before easing off.

The index closed last year at an all-time high of 3,756, amid optimism around a fresh coronavirus stimulus, as well as the vaccine rollout.

Its 16.3% annual gain in 2020 compares to an average of 11.8% over the previous decade. Since the turn of the century it has now recorded a positive year in 14 out of the first 21 years.

While many businesses have struggled during the pandemic, tech sector internet-related shares have helped to lift US indexes. Shares in Apple, Microsoft and Amazon accounted for over 16% of the S&P 500’s total returns last year.

US manufacturing activity picked up at its briskest pace in more than six years in December. Meanwhile, manufacturing activity is also increasing in the Eurozone and Asia, which should support overall economic sentiment.

With fiscal and monetary support from the Treasury and the Federal Reserve Board, and a successful Covid-19 vaccine rollout, the US stock market could be well-positioned for further gains in 2021.

US dollar looks weak

On the flipside, the US dollar had a rough 2020 and it is unclear whether the new year will bring any joy to the much beleaguered currency. The US dollar index weakened by more than 6% in 2020, a trend that looks set to continue this year.

The greenback fell against many of the major currencies on the first trading day of 2021. The euro was up 1.4% against the dollar, trading at $1.23, while China’s renminbi rallied beyond Rmb6.5 for the first time since June 2018.

Covid-19 has taken a particularly heavy toll on America, resulting in a massive drop in production and consumption. The high death rate has eroded consumer confidence and delayed the prospect of a recovery.

Uncertainty surrounding the election also hit the value of the dollar, while more expensive imports as a result of the cheapened currency have worsened the domestic economy.

The US dollar is the world’s foremost reserve currency and the main currency for doing international business. While this is unlikely to change any time soon, there are fears it could fall further in 2021.

An improving global outlook as Covid-19 vaccines are rolled out, along with rock-bottom US interest rates and bond purchases by the Fed have made investors bearish about the dollar.

Additional fiscal stimulus and rising fiscal and current account deficits could also hurt the currency in the coming year, so investors need to take care.

This post originally appeared on the eToro blog.

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