Why the SPDR S&P 500 ETF Is a Buy On Any Dip in 2021

After the novel-coronavirus-induced selloff in March 2020, who would have thought that the SPDR S&P 500 ETF (NYSEARCA:SPY) would be ramming to new all-time highs at the end of the year? The SPY has done just that, ending 2020 in remarkable fashion.

Smiling piggy bank against stock chart background. Represents cheap stocks and undervalued stocks.
Source: Shutterstock

But is the run done with?

I don’t think so. Instead, equities can continue to power higher as we forge through 2021. That doesn’t mean the ride will be a straight line higher — it never is. There will be bumps along the way and those bumps could certainly be felt in the first quarter. 

But ultimately, I think that turbulence will be a buying opportunity. Let’s dig a little deeper. 

Rough Waters in the First Quarter?

The S&P 500 continues to trade quite well as far as momentum is concerned. It and the other three major U.S. stock indices — the Dow Jones, Nasdaq and Russell 2000 — continue to grind higher in a slow-but-sure manner. 

In fact, the SPY stock is not even in overbought territory, according to multiple measures. However, there are pockets of euphoria in the market. That’s as investors continue to speculate with call options, while gobbling up IPOs and SPAC offerings.

Perhaps it’s just the end-of-year action within a tricky 2020, but there’s also some eyebrow-raising breadth occurring under the radar. Let’s also not forget that more than 3,000 people are dying per day in the U.S. due to the novel coronavirus or that jobless claims remain elevated. Non-farm payrolls haven’t been perfect either, while there could be a wave of evictions after January. 

Daily chart of SPY stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Here’s the thing: I’m not a stock market bear, but I am cognizant of the realities we face right now. However, I’m also conscious of the pent-up demand sitting below the surface among tens of millions of consumers. 

In short, there are some short-term headwinds, but many more longer-term tailwinds.

How many people have the craving to go out to eat or get on a plane and take a trip? Millions upon millions. Whether that’s a vacation to Europe or a weekend trip to Vegas, there is a tremendous amount of money on the sidelines just waiting to get pushed back into the economy.

 

Although the market may give us a couple of shake-outs in Q1 and while some of the economic numbers may be hazy, the rest of the year should be solid. Especially with vaccines in the mix. 

I’m a buyer of the dips, particularly in Q1. 

Why SPY Stock?

The SPY stock gives investors access to the market’s 500 largest companies. In essence, it tracks the most critical index, that being the S&P 500. 

It is one of the fastest, easiest and most convenient ways to get broad-based exposure to the overall market. Name another way to get exposure to the largest market capitalization stocks, while also grabbing a stake in each sector. 

Obviously there are a lot of small- and mid-cap stocks that are left out of the S&P 500 and thus the SPY stock, but it’s an excellent way to add or subtract market exposure in a hurry. 

Not to mention the liquidity benefit we get with the SPY stock. Unlike a number of exchange-traded funds, the SPY has robust volume. It’s one of the most actively traded securities in the U.S., ensuring plenty of liquidity for investors. That liquidity stretches to the options market, if that pertains to certain investors. 

That liquidity is helpful during dips. Since we are buying the selloffs this year, deep liquidity will be to our benefit when we look to quickly add market exposure to our portfolios. 

With a gross expense ratio of just 0.09%, it’s also dirt cheap to own. The 1.60% dividend yield isn’t quite double the 10-year Treasury yield of 0.92%, but it’s close. 

Bottom Line on Stock Prices

Stock markets don’t rally in a straight line. As pundits say, stocks take the escalator up and the elevator down. Please don’t misconstrue my earlier comments on Q1 as being overly bearish. It’s simply a culmination of several observations. 

It would be silly to ignore the fact that the SPY stock is up 70.5% from the March low and more than 15% over the last two months. It would also be foolish to ignore the monstrous run we’ve seen in growth stocks or the fiery rise of IPO and SPAC stocks. 

Likewise though, it would be even more foolish to ignore the very clear positives we have going on right now. Such as the fact that U.S. stocks are a global leader in the equity markets. Or the fact that the economy is doing pretty darn well given the state of the pandemic and the fact that we have clarity around the presidential election. In short, headwinds are fading and tailwinds are appearing. 

As vaccines continue to work through the population, we’re setting up for a robust 2021 in the U.S. economy. Therefore, the dips need to be bought and the SPY stock is a perfect vehicle for this approach. 

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2021/01/why-the-spdr-sp-500-etf-is-a-buy-on-any-dip-in-2021/.

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