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U.S. stocks closed 2020 on a strong note, and many investors are betting the party will continue after a tumultuous year that marked the end of the longest bull market and the shortest bearish market ever.
The risks are plentiful, including the resurgence of a coronavirus pandemic, concerns about the speed of vaccine distribution, and major US Senate disputes on January 5 in Georgia for the balance of power in Congress. Still, many investors are ignoring these threats.
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“We will continue to see a higher momentum,” said Commonwealth Financial Network’s head of portfolio management, Peter Essele, who sees stocks in the early stages of a multi-year bullish run.
The options market is pricing more volatility in January than in December, probably due to the Georgia elections. If Republicans win at least one Senate seat, they will retain a small majority.
If the Democrats won both rounds, the chamber would be divided by 50-50 and the tiebreak vote would go to Vice President-elect Kamala Harris, giving President-elect Joe Biden’s party full dominance over Congress. This raises the possibility of tax reform proposals that many investors fear will affect share prices.
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Still, most investors are not looking for a sharp downturn in the coming year. BofA Global Research’s December survey of fund managers was the most optimistic.
The launch of coronavirus vaccines encouraged investors, along with the US Federal Reserve’s expressed readiness to maintain accommodative policy, the strategists said.
In fact, the recovery in the US stock market over the past two months may have taken the bulls by surprise. A survey in late November revealed that strategists expected the S&P 500 to end 2021 at 3,900, which would be another annual increase after the index rose about 16.3% this year to 3,756.07.
2020 was a wild year for Wall Street, marked by the end of the biggest bull market in history with the destruction of stocks due to the COVID-19 shutdowns and a rebound in the elastic rope in hopes of economic recovery that resulted in the smallest bear market on record .
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In previous bull markets, when the S&P 500 takes its previous bull out of the bull market, the index experienced a median gain of 38% over 26 months before reaching the top, according to data from the Bespoke Investment Group.
Some investors fear that the recovery of COVID-19 is already priced and valuations may be stretched. The S&P 500 12-month term price / earnings ratio is currently around 22, well above its long-term average of 15.
Still, investors see various parts of the market, including financial, leisure and hospitality stocks and energy with potential for recovery.
“The market in general does not look overbought,” said Tim Ghriskey, chief investment strategist at the Inverness Council.
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Investors looking for a continued recovery are optimistic about a recovery in corporate profits.
“The gains will be used as a confirmation of current prices,” said Essele.
The earnings of the company S&P 500 are expected to increase by about 23% in 2021 compared to 2020.
For much of this year, increasing market concentration was an uncomfortable concern for investors, with the top five constituents 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 weight of technology in the S&P 500 is currently 28%, more than 10 percentage points compared to its historical average since 1990, according to Bespoke.
“What we saw in November and December is that the market has already started to expand … in addition to technology stocks, mega stocks,” said John Praveen, portfolio manager at QMA, PGIM, pointing to strong performance by value stocks, small cap stocks and non-American stocks.
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The gold rush of some high-growth, growing names may continue, investors said.
“Do not exclude growing companies with dominant and emerging business models that can continue to meet or exceed high shareholder expectations,” said Tony DeSpirito, director of investments for BlackRock in the US, in a note.
With vaccines being rolled out, investors are looking at “the light at the end of the tunnel,” said Praveen, who expects this year’s most delayed stocks and sectors to join the high in 2021.
“Think of it as your car firing on all cylinders … it’s a much wider and healthier rally,” said Praveen.
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(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies, David Gregorio and Chris Reese)