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U.S. stocks ended 2020 on a high note, and many investors are betting the party will continue after a tumultuous year that marked both the end of both the longest bull market and the shortest bear market of all time.
Risks abound, including a resurgent coronavirus pandemic, concerns about the speed of vaccine deployment, and the January 5 high stakes in the US Senate in Georgia for the balance of power in Congress. Yet many investors are looking beyond these threats.
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“We’re going to continue to see a higher surge,” said Commonwealth Financial Network head of portfolio management Peter Essele, who sees stocks in the early stages of a multi-year bull run.
The options market is pricing in more volatility in January than in December, possibly due to the election in Georgia. If Republicans win at least one Senate seat, they will retain a slim majority.
If Democrats swept the double-ballot, the house would be split 50 to 50 and the deciding vote would go to Vice President-elect Kamala Harris, giving President-elect Joe Biden’s party full power over Congress. This raises the possibility of tax reform proposals which many investors fear will hurt stock prices.
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Yet most investors are not looking for a sharp pullback next year. BofA Global Research’s December survey of fund managers was the most optimistic.
The coronavirus vaccine rollout has encouraged investors, as well as the expressed willingness of the U.S. Federal Reserve to maintain an accommodative policy, strategists said.
Indeed, the rally in the US stock market over the past two months may have even surprised the bulls. A late November poll found that strategists expected the S&P 500 to end 2021 at 3,900, which would be another annual rise after the index rose about 16.3% this year to 3,756, 07.
2020 has been a crazy year for Wall Street, closed at the end of the longest bull market in history with stocks plummeting by COVID-19 closures and a bungee cord rebound on hopes of economic recovery which resulted in the shortest bear market on record.
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In previous bull markets, when the S&P 500 broke its previous bull market peak, the index saw a median gain of 38% over the 26-month period before surpassing, according to data from Bespoke Investment Group.
Some investors are concerned that the COVID-19 upturn is already being reflected and valuations may be stretched. The S&P 500’s 12-month forward price-to-earnings ratio is currently around 22, well above its long-term average of 15.
Still, investors see several segments of the market, including financials, leisure and hospitality stocks, and energy with potential for recovery.
“The market, on the whole, does not appear to be overbought,” said Tim Ghriskey, chief investment strategist at Inverness Counsel.
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Investors looking for a continued rebound are bullish on a rebound in corporate earnings.
“The revenues are going to be used as confirmation of current prices,” Essele said.
S&P 500 profits are expected to increase by around 23% in 2021 compared to 2020.
For much of this year, increasing market concentration has been a nagging concern for investors, with the five major constituents of the S&P 500 generating 127% of the index’s return in the first nine months of the year. year, as calculated by BlackRock.
The weight of technology in the S&P 500 currently stands at 28%, up more than 10 percentage points from its historical average since 1990, according to Bespoke.
“What we saw in November and December is that the market has already started to widen … beyond tech stocks, mega stocks,” said John Praveen, portfolio manager at QMA, a PGIM company, highlighting a good performance in value stocks, small cap stocks and non-US stocks.
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The golden race of some top-flight growth names could continue, investors said.
“Exclude growth companies with dominant and emerging business models that may continue to meet or exceed high shareholder expectations,” said Tony DeSpirito, director of core US equities investments for BlackRock, in a note.
With the vaccines rolled out, investors are watching “the light at the end of the tunnel,” said Praveen, who expects stocks and sectors lagging this year to join the rally in 2021.
“Think of it like your car pulling all cylinders… it’s a much wider, healthier rally,” Praveen said.
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(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies, David Gregorio and Chris Reese)
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