US stocks 2020 closed on a strong note, and many investors are betting that the party will continue after a tumultuous year that saw the end of the longest bull market and the shortest-lived bear market ever.
Risks abound, including a resurgence Corona Virus Pandemic, concerns about the speed of launching vaccines and the great risks On January 5, the run-off in the US Senate in Georgia for the balance of power in Congress. Many investors are still looking beyond these threats.
“We will continue to see a bullish momentum,” said Peter Easily, head of portfolio management at the Commonwealth Financial Network, who sees stocks in the early stages of a multi-year rally.
The options market is experiencing more volatility in January than in December, most likely due to the Georgia election. If Republicans won at least one seat in the Senate, they would maintain a slim majority.
If the Democrats swept the double rounds, the room would be split 50-50 and the decisive vote would go to Vice President-elect Kamala Harris, giving Party of President-elect Joe Biden Full control of Congress. This raises the prospect of tax reform proposals that many investors fear will hurt stock prices.
Most investors are still not looking for a sharp downturn next year. The fund manager survey by BofA Global Research for December was the most optimistic.
Strategists said that the introduction of coronavirus vaccines encouraged investors, along with the US Federal Reserve’s willingness that it expressed to maintain policy accommodation.
In fact, the US stock market rally over the past two months may have surprised even the bulls. A poll conducted in late November showed that strategists had expected the S&P 500 to end in 2021 at 3,900, which would be another yearly increase after the index rose 16.3% this year to 3,756.07.
2020 was a wild year on Wall Street, booked by the end of the longest bull market in history with the beating in stocks due to the COVID-19 lockdown, and a rebound rope on hopes for an economic recovery that led to the shortest bear market on record.
In previous bull markets, when the S&P 500 index crossed a previous high in a bull market, the index saw an average gain of 38% over 26 months before topping out, according to Bespoke Investment Group data.
Some investors fear the COVID-19 recovery may actually be priced in and valuations may extend. The 12-month price-to-earnings ratio for the S&P 500 is currently around 22, well above its long-term average of 15.
However, investors see several parts of the market, including financial, entertainment, hospitality and energy stocks with potential for recovery.
“The market overall does not appear to be overbought,” said Tim Gresky, senior investment analyst at Inverness Consult.
A wider rally
Investors looking for a sustained rally are optimistic about a recovery in corporate earnings.
“The profits will be used as confirmation of current prices,” Essele said.
S&P 500 earnings are expected to increase about 23% in 2021 compared to 2020.
For most of this year, increased market focus has been a troubling concern to investors, with the top five components of the S&P 500 generating 127% of the index’s return during the first nine months of the year, according to BlackRock calculations.
The technology weight in the S&P 500 currently stands at 28%, up more than 10 percentage points from its historic average since 1990, according to Bespoke.
“What we saw in November and December is that the market is really starting to expand … beyond technology stocks, and jumbo stocks,” said John Pravin, portfolio manager at QMA, PGIM, referring to a strong performance of value stocks. , Small cap stocks and non-US stocks.
Investors said the golden wave of some high-growth names could continue.
“Do not exclude those growing companies with dominant and emerging business models that can continue to meet or exceed the expectations of lofty shareholders,” Tony Desperito, chief investment officer in US core active stocks of BlackRock, said in a note.
With the release of vaccines, investors are looking at “the light at the end of the tunnel,” said Pravin, who expects stocks and lagging sectors this year to join a rally in 2021.
“Think of it as your car that shoots all cylinders … It’s a much broader, healthier march,” Pravin said.
(Covering Saqib Iqbal Ahmed; Editing by Megan Davis, David Gregoryo and Chris Rees)