Investors ended one of Wall Street’s craziest years on record by piling on everything from bitcoin to emerging markets, with hopes that a powerful economic comeback will fuel even more gains.
The sweeping climb known as the “rally of everything” accelerated late in the year, propelling the S&P 500 to its 33rd record of 2020 last week. Following a collapse at the start of the year, the overall gauge of US stocks, global stocks and a commodities index rose by at least 35% between the end of March and the end of the year, only the third time in numbers going back five decades all of these investments have grown so much in such a short time, according to Dow Jones Market Data. The two previous nine-month periods in 2009 were the end of the financial crisis.
The S&P 500 ended the year up 68% from its March low, after losing more than a third of its value in about a month. Government bond yields, which fall as prices rise, remain near their historic lows. At the same time, corporate bond yields also fell after the turmoil at the start of the year. This means that many bond investors ended the year with gains. And crude oil prices in the United States have returned to nearly $ 50 a barrel after briefly dropping below $ 0 for the first time in April.
After the meteoric rise during a global pandemic highlighted confidence that central banks and governments would support the global economy, many investors now expect vaccines to be delivered to markets.
Sentiment gauges from organizations, including the American Association of Individual Investors, show a decline to multi-year lows. Meanwhile, tens of billions of dollars have recently been invested in exchange-traded funds and mutual funds that track stocks. Both of these trends have preceded past setbacks, signaling excessive optimism to some cautious investors. Some draw parallels to the outsized gains in late 2017 and early 2018, before trade tensions and rising interest rates stirred markets.
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“Investors can’t take enough risk, whatever it is,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “Momentum is a powerful force, and we don’t want to fight it.”
The firm maintains its investment in US equities in line with the benchmark index it tracks and favors the economically sensitive industrial sector. At the same time, she avoids increasing her stocks and sticking to a neutral position on bonds.
Analysts still see potential slowdowns on the horizon, including a recent spike in coronavirus cases and a pair of run-off races in Georgia this week that will determine which party controls the Senate under President-elect Joe Biden. The Democrats’ takeover could raise concerns about higher taxes for businesses and investors with capital gains, traders say. Bets on larger budget spending could also hurt bonds and boost yields.
Yet many observers still expect extremely low interest rates to continue to support bonds while pushing investors to seek higher yielding assets. While many US tech stocks have hit record highs, many investors are buying stocks of economically sensitive companies, commodities, and stocks of emerging market companies, all of which remain below their highs.
Their gains underscore optimism that the economy will explode in the second half of 2021, even if the coming months present obstacles to recovery.
“We really encourage our clients to look beyond” the turbulence expected in the first half of 2021, said Meghan Shue, head of investment strategy at Wilmington Trust. The company has increased its investments in US stocks and emerging markets in recent months.
Companies including Apple Inc.
which benefited from the stay-at-home trend ended the year with astonishing market values, while all of electric carmaker Tesla Inc.
to copper producer Freeport-McMoRan Inc.
also posted exceptional returns.
This highlights the growing magnitude of the recovery, but high projections for the tech sector and more growth-sensitive stocks remain a concern for some fund managers.
“Expectations for some segments are overcooked,” said Lee Baker, president of Apex Financial Services in Atlanta. He recommends that clients give preference to banks and cheaper stocks related to New Year’s travel.
Fund managers polled by Bank of America last month said they held less cash than the benchmarks they were tracking for the first time since May 2013, another indication that investors were moving money to riskier parts of the market. Many of those interviewed have recently increased their investments in areas such as emerging markets.
“These markets have a lot more potential for recovery,” said Michael Kelly, global head of multi-asset at PineBridge Investments. He favored emerging markets as well as French and Spanish equities in recent months, believing that a recovery in global growth, helped by government stimulus measures, will help them outperform.
Investors were particularly encouraged by recent economic data showing that the Chinese economy was growing after the country largely contained the coronavirus, a boon for other emerging markets and commodity producers. Analysts now hope the United States and Europe will catch up.
Even with the worsening pandemic in these regions, economic data has remained largely stable, with vaccine rollouts giving more confidence to consumers and businesses.
It is also contributing to the big rebound in stocks related to sectors affected by the pandemic, including travel and leisure, but some investors are concerned that these companies may not meet high expectations as the recovery continues.
“You have to be careful on some of these reopening trades that sentiment isn’t already factored in,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments. It favors faster growing companies tied to technology infrastructure and waiting for a pullback to add to its positions.
Write to Amrith Ramkumar at [email protected]
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