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2021 Investment Outlook

We think we speak for just about everyone when we say, “Good riddance, 2020!” More than ever before, we’re ready to put last year in the rearview mirror and start fresh with a clean slate. 

Between COVID-19, a contested presidential election, civil unrest and much more, many Americans are feeling a whirlwind of emotions. There are a lot of hurting people out there, wondering what’s in store for the future. Maybe you’re one of them. But there is good news! With coronavirus vaccines beginning to roll out, there’s reason to believe that economic life might be returning back to normal sooner rather than later.

What does that mean for your investments in 2021? In this investment outlook, we’re going to take a look at some important economic indicators and what they might be able to tell us about what’s coming.

But no matter what happens in 2021, remember this: You control your financial future. Not the White House. Not Wall Street. Not your employer. You. It’s your job to save and invest for retirement. No one’s going to do it for you.

Ready to dive in? Let’s do this!

How Much Can You Save for Retirement in 2021?

Here’s the deal: The IRS isn’t really changing things much from last year. So how much you were allowed to invest in 2020 will pretty much be the same in 2021.

  • The IRS is keeping the annual contribution limits for employer-sponsored retirement plans to $19,500 (up from $19,000 in 2019). This includes folks who contribute to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.
  • For those who are nearing retirement and need to catch up, you can also put in an extra $6,500 into your plan if you’re age 50 and older!1

What about the annual limit for IRAs? That stays the same at $6,000—and that goes for Roth and traditional IRAs. If you’re age 50 or older, the catch-up contribution limit will also remain at $1,000, so you can put up to $7,000 into an IRA in 2021 if you’ve fallen behind on your retirement savings.2

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One last thing before we move on: You’ll be able to save just a little bit more in your health savings account (HSA) if you have one. For 2021, individuals can save up to $3,600 (that’s a $50 increase) while families can put $7,200 (a $100 bump from last year) into their HSAs.3 It’s a really small change, but it’s something!

What Are Economic Indicators?

Economic indicators are just some statistics and trends that give us insight into how the economy is doing and where it might be headed. That’s the short and sweet of it. Think of these economic indicators as thermometers that help us keep an eye on the temperature of the overall economy.

Here are five of the major economic indicators to keep an eye on in 2021:

  1. Stock Market
  2. Housing Market
  3. Interest Rates
  4. Unemployment Rate
  5. Consumer Confidence

Let’s take a look at these indicators and find out what they could mean for you and your money.

1. Stock Market

The stock market is kind of like your local supermarket—the biggest difference is instead of buying bread and milk you’re buying and selling stocks, which are basically small pieces of ownership in a company.

The S&P 500 Index measures the performance of the 500 largest, most stable companies in the New York Stock Exchange. The S&P 500 is considered the most accurate measure of the stock market as a whole. When this index increases, the economy is usually doing well. Still with us?

You know we're always telling people that the stock market is like a roller coaster—full of ups and downs that can make your head spin. Well, the stock market in 2020 definitely felt like one big, scary roller coaster ride. Let’s take a quick look back at what happened—and what we can expect moving forward.

The stock market was chugging along just fine at the beginning of 2020 . . . then the coronavirus happened, plunging stock prices faster than one of those amusement park drop tower rides. From late February to late March, the S&P 500 and the Dow Jones Industrial Average—another popular index used to measure the stock market—went from all-time highs to bear market territory (that’s when the stock market’s value drops by 20% or more) in record time.4 Before we knew it, we were in an economic recession for the first time since the 2008 financial crisis.

But guess what? By the end of the year—despite the coronavirus fears, the lockdowns, the chaos surrounding the presidential election, and even the murder hornet “invasion” (remember that?)—the S&P 500 actually grew by 16%.5 That’s right! When it was all said and done, stock values actually went up in 2020.

All of this confirms what we’ve been saying since the beginning of this crisis: No matter what the stock market is doing, stay focused on the long term, avoid making decisions out of fear, and keep investing in retirement (as long as your financial situation is stable).

And you might be wondering about how the economy will respond to a new administration entering the White House. Listen, the stock market has done well under both Republican and Democratic presidents, so our advice is the same: Stay focused and keep putting money in your 401(k), your Roth IRA, and do not cash them out “just in case.”

2. Housing Market 

So, now that we’ve taken a look at what’s happening with the stock market, what’s in store for the housing market? Well, there are a few trends we want you to be aware of as the year begins:

  • Low housing inventory means there are less options for buyers. So if you’re planning to buy a home this year, you’re going to have to be quick on the draw since homes are getting snatched up fast.

  • Home prices are still going up, up, up thanks to high demand. That’s music to the ears of home sellers! In October 2020, the median home price was $313,000—a 15.5% increase from a year earlier.

  • Mortgage interest rates should stay really low. Good news for potential home buyers: Rates dipped to record lows late in 2020 and most experts think that interest rates will continue to hover around 3% in 2021.6,7

So if you’re selling a home in 2021, high demand coupled with low interest rates could land you a really good deal. What if you’re planning to buy a home? Our advice is simple: Be patient. Save up a good-sized down payment and make sure you buy a house that you can afford. The last thing you want to do is get stuck with a mortgage payment you can’t afford.

Whether you’re buying or selling a home in 2021, get in touch with one of our real estate professionals. They know your housing market like the back of their hand and can help you buy or sell your home with ease!

3. Interest Rates

Okay, hang with us here. The Federal Reserve, which is the U.S. central bank in charge of the nation’s policies on money, has two main goals: to continue growing the economy at a sustainable rate and keep inflation (the price of everything from gas to milk) under control.

How do they do that? The Fed gets together four times a year to decide what to do with the nation’s interest rates. Lower interest rates can help give the economy a jolt, but they can also lead to higher inflation. Higher interest rates can slow inflation down, but if they’re too high they can also choke economic growth. So, they try to find a balance that’s just right.

With the economy going through the wringer in 2020, the Federal Reserve kept interest rates anchored near zero percent and it will probably stay that way for several years—at least through the end of 2023, according to officials at the Fed. This policy isn’t set in stone, but the goal is to try to get the economy back to full strength after the recession by making it easier to borrow money.8

But listen, folks, we don’t care how high or how low interest rates are—borrowing money for things like a car loan or a home equity loan is always a bad idea. We want interest to work for you, not against you. Debt is not your friend. It takes your time and money and it gives you headache and heartache in return.

4. Unemployment Rate

This next one is easy. Each month, the unemployment rate tells us how many people got (or lost) a job. It’s one of the clearest ways to see which way the economy is moving. Rising unemployment is scary—that means fewer jobs and an economy that’s in serious trouble. Lower unemployment means more people are finding work and the economy is getting stronger . . . which is what we all want.

We're not going to sugarcoat it: 2020 was a really tough year for many workers. The pandemic turned the jobs market upside down and millions of workers saw their jobs disappear overnight (at least for a little while). At its highest point, the national unemployment rate hit 14.7% in April.9 That means at one point, there were 23.1 million people out of work.10

The good news is that some of those jobs have started to come back as the economy slowly started to open back up. By the end of 2020, the unemployment rate dropped below 7%.11 We’re not quite where we were before the coronavirus nightmare began, but we’re getting there. If the pandemic begins to fade away, we can expect the jobs market to heal pretty quickly in 2021.

So, what does all that mean for your investments? Well, many companies have been in “survival mode” since the start of this pandemic. As those fears subside, you can expect hiring to pick back up which means more growth. If you didn’t panic and stayed invested in mutual funds with stocks from those companies, you can expect your portfolio to get a nice boost from that recovery! 

5. Consumer Confidence

You can usually tell when someone feels confident. They walk with their head held high, they puff out their chest, and they have a swagger in their step. They also tend to spend more and save less! Well, that last part is what the Consumer Confidence Index says, at least.

The Consumer Confidence Index measures how everyday Americans feel about the economy. When people are confident, they typically spend more money. When their confidence is low, they do the opposite.

While the Conference Board’s Survey of Consumer Confidence from November 2019 showed that consumer confidence dropped for the fourth straight month, confidence levels are still pretty high.

It’s not a surprise that consumer confidence took a big nose dive in April once the coronavirus showed up, hitting its lowest mark in six years.12 How are they feeling heading into a new year? Not much better (at least not yet). Many folks cut back on spending and stopped going to restaurants with new coronavirus cases surging during the 2020 holiday season, and they don’t see the economy getting much better in the near future.

And with coronavirus vaccines beginning to roll out, hopefully that means the economy will open up even more and consumer confidence continues to rise. But if 2020 has taught us anything, it’s that anything can happen—good or bad. So make sure you’re prepared for anything 2021 might throw your way!

Here’s the Bottom Line

The key to building wealth is consistency. That’s the thread that ties millionaires together.

No matter what was going on in Wall Street or who is in the White House, they kept working hard and they kept putting money away. They didn’t get distracted. They didn’t put their hard-earned money in a flashy investing trend they didn’t fully understand. They didn’t panic every time the stock market had a bad day.

And one day, they looked up and saw their nest egg hit the seven-figure mark. Now that’s what winning looks like. And there’s no reason that can’t be you someday.

Need More Investment Advice? Find a Pro!

We hope this information gives you more confidence about investing and the economy. But we're guessing you probably have more questions about your particular situation. While we can’t speak into the specifics of your financial plan, the good news is you can sit down with an investment professional in your area who can.

It’s a new year, people! It’s time to get to work!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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