Covid made huge market positive aspects – what occurs subsequent

Traders work on the trading floor of the New York Stock Exchange.

NYSE

The pandemic made 2020 a year of unprecedented events – not least the rapid crash and record recovery of the stock market.

The higher race of the market was in stark contrast to a slowly growing economy.

According to monthly data from the Department of Labor, many small businesses are in trouble and more than 10.7 million people are unemployed.

Even so, the market has grown faster due to expectations of strong growth now that vaccines are widely used and the economy is fully open again.

The same expectations have helped attract a different cohort of investors, many of whom are young and new to investing. JMP estimates the brokerage industry added more than 10 million new accounts in 2020, with Robinhood alone likely accounting for around 6 million.

“One of the things that the pandemic underscored more than anything is that the stock market is a forward-looking mechanism,” said Michael Arone, chief investment strategist at State Street Global Advisors. “That has been the slogan throughout the year as investors keep scratching their heads wondering why the stock market could do so strongly while the economy, jobs and earnings face such challenges. It’s more about future expectations than current conditions. Those were investors. ” always loosely conscious in the back of my mind. “

The market collapse and recovery ran parallel to America’s response to the virus.

There was shock and fear followed by hope for a rebound, but with some setbacks along the way as the virus continues to spread as investors look forward to the vaccine.

2020 started as expected, and then things went badly quickly in late February and March as the pandemic spread and government officials around the world and in the US ceased economic activity.

“It usually takes an unexpected event to hit the market and no one before the New Year to think about said we were going to have a virus problem in 2020,” said Sam Stovall, chief investment strategist at CFRA. “Everyone makes their annual forecast in early December. So if the market were still at an all-time high on February 19th, the majority of people would obviously still believe it was going to be a good year, and even with the virus in the background, it would be.” not be a world changing event – and oh, how we were wrong. “

The virus has thrown many trends that were already underway into hyperspeed.

“Everything was so fast. We went from high to low in 33 calendar days, which was three times as fast as the 1987 bear market. February 19th was the record. It fell 34% in 33 calendar days,” said Stovall. “The Fed said we will do whatever it takes. The market said you didn’t fight the Fed and we had to break even on August 18th. This was the fastest rebound in history and we have had 19 new highs since then achieved. ” then.”

Why a pullback might be lurking

The S&P 500 has risen more than 65% since the March low and nearly 16% over the year. The Nasdaq is 44% higher for the year. Stovall and other strategists say it wouldn’t be surprising to see a pullback early in the new year, but he and others expect the market to end the year higher.

“The ratings are currently trading at a premium of 42%,” said Stovall. He was referring to the premium over the average 12-month price-to-earnings ratio of 16.7 for S&P 500 shares in 2000.

“There’s always a strange dichotomy between stocks and the economy, except in the early stages of a recession when the economy is falling sharply. The first news that the economy is collapsing seems to crush the stock market, but the recovery is much longer than that for the economy it’s for stocks, “said Chris Rupkey, chief financial economist at MUFG Union Bank.

“The only difference in this stock market is that the stock indices have reached levels we’ve almost never seen before … We haven’t had any valuations since the internet sock bubble in the late 1990s seen.” he added. “It’s okay for stocks to be here when companies are making big bucks next year.”

According to Rupkey, investors point to the last rebound in 2009 and find that stocks rose before the economic rebound. But he noted that at that time, ratings rose into teenage years, not past 30.

The way investors view the market has changed too, and this may be a direct result of the impact of the pandemic on the economy.

“When we see an economic downturn, people tend to gravitate towards staples, utilities, and health care. … In a traditional downturn, you’ve been on the defensive,” said Tobias Levkovich, chief US equities strategist at Citigroup. Utilities are negative yoy, down about 5%. Consumer staples are up 6.9% and healthcare is up 10%.

Levkovich also says it wouldn’t be surprising if the fast-growing market pulled back in the new year. He said a 10% to 12% retracement is possible.

“The ‘defensive’ in the Covid world became a person who could grow in an economy where there is no growth,” Levkovich said. That would be like e-commerce or Amazon, which has increased by 80% over the course of the year.

“Defensive meant bulletproof balance sheets with free cash flow, and you ended up buying mega-cap technology,” Levkovich said. The S&P information technology sector grew nearly 42% over the year, making it the top performing of the major sectors.

“All in one fell swoop, mega cap was large cap, mega cap was defensive and mega cap was growth,” he said.

Stay at home towards recovery

As the market climbed out of its pit, investors picked stocks that would do well as people worked from home and children attended school from afar. They punished stocks in companies they couldn’t enjoy anymore – like airlines and cruise lines.

When vaccines became a reality, they began buying stocks that would be good for an economic recovery.

“We have seen more small investors enter the market, as well as all of our competitors across the board, like we have never seen before,” said JJ Kinahan, chief marketing strategist at TD Ameritrade. “We’ve seen the use of options increase and people have understood how to use options. … They define their risk, which is something new. Retail investors tend not to.”

Kinahan said retail investors are also able to trade higher-priced stocks like Tesla and Amazon through the options market. He said many of the investors are young and new to investing and trading. At TD Ameritrade, millennials make up about 30% of retail customers, a 35% increase over three years.

As the stock market soared, there was also a massive boom in IPOs, the biggest wave of issuance ever. Investors have also leveraged their holdings, and margin debt is at an all-time high, a potentially contrary warning.

“Right now there is this great expectation. The downside is that we can really do what everyone expects. What happens to the overall market?” Kinahan said. He said one question is whether pandemic favorites Peloton and Zoom can continue the growth they had after the world returned to normal.

Levkovich said he is also in favor of some areas that will rebound with the economy.

“I think the most attractive bucket is probably leisure, hospitality and entertainment. That is where there is massive demand that cannot be met,” he said.

– CNBC’s Kate Rooney contributed to this story.

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