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The current recession was not due to the mass taking risks, but to a virus that forced it to stop.
Courtesy of NYSE
An abnormally bad year led to abnormally large gains for the stock market in 2020. However, a return to normalcy could lead to disappointment.
He
Dow Jones industrial average
it has advanced 5.8% in 2020, to 30,179, after gaining 0.4% last week. He
S&P 500
increases by 15% this year, to 3709, after having increased by 1.3% per week, although
Tesla
(ticker: TSLA), which shot up 731% in 2020, will not join the index until Monday. He
Nasdaq Composite
has jumped 42% in 2020, to 12,756, after gaining 3.1% during the week. Even the
Russell 2000
has entered the act, rising 18% in 2020.
These gains came despite the large amount of bad news that hung in the year: the coronavirus that shut down the economy and killed more than 300,000; the uninterrupted attention to politics, which made every brand on the stock market a referendum on elections; and the death of George Floyd and subsequent protests. It is a reminder that the market has no emotions, does not respond to indications that individuals can, and values what may happen above what has happened.
Next year promises to be less traumatic. Last week, people in the United States began vaccinating themselves against the coronavirus, and some expected 100 million Americans to have been shot by the end of the first quarter. The return of everyday life to something more like normal should provide an incredible boost to the economy, which would ultimately help the U.S. escape the slow-growing unrest it was undergoing by both Barack Obama and by Donald Trump, when the -product growth had trouble reaching 3% in a given year.
In fact, the most important mistake investors can make is to look at the past decade and extrapolate it to the future. The latest recession was caused by a financial crisis that left banks with sore balance sheets, risk appetites off and stagnant growth, thanks to a lack of major fiscal stimulus and the Federal Reserve being too worried about inflation never going up. to arrive.
This time, trillions of dollars in tax incentives were distributed immediately, and there are likely to be more. The Fed also seems to be realizing the mistake made after the 2008 financial crisis and has promised not to tighten monetary policy until 2023.
Most importantly, the current recession is not due to excessive risk-taking, but to a virus that forced the closure. That means the recovery should be faster and stronger than the one that began in 2009, says Christopher Harvey, U.S. equities strategist
Wells Fargo
Values. “This is not a recovery of J, K, XYZ or any letter you want to throw at it,” he argues. “It’s a V-shaped recovery.”
This is certainly not the consensus view. Economists predict that the U.S. economy will grow at a rate of 4% by 2021, faster than usual from 2010 to 2019, but not enough to undo the damage caused by the coronavirus recession until in 2022 or 2023. There is a good chance it will be much faster than that, says Michael Darda, chief economist at MKM Partners, which estimates that GDP will expand 4.5% to 6.5% next year, while average inflation from 2.5% to 3.5%.
“The second half of the year should be very strong, as the deployment of vaccines and the intensification of efforts to reopen the therapeutic ramp,” he says. “The accumulation of billions of liquid assets in the household sector will be reduced,” as households spend on many services (leisure and hospitality, etc.) in which they could not spend during 2020. “
But, as we have heard so many times in 2020, the economy is not the market. It’s not that growth isn’t good for stocks, it’s absolutely so. A booming economy means the S&P 500 earnings could grow from 15% to 20% next year, Darda says. But strong growth could also lead to increased Treasury yields and this would put pressure on market valuations, especially those of high-priced growth stocks in the technology, communications services and discretionary sectors. Investors use Treasury yields as a risk-free rate and the higher they rise, the more valuations of growth stocks can fall. “The market will be flat to single digits up / down, as multiples are contracted with higher discount rates,” says Darda.
Harvey, of Wells Fargo, agrees. He predicts that by 2021 investors will see big-fly technologies come out and become more economical and economically sensitive stocks. But technology is a huge part (28%) of the S&P 500.
apple
(AAPL) represents only almost 7% of the index and
Microsoft
(MSFT), more than 5%. If these stocks tread water or even puff, the index could have trouble moving forward.
“If they don’t work, it will have a significant weight on the index,” says Harvey, who has a 3850 target by the end of 2050 on the S&P 500.
His advice: buy stocks with a high “Covid beta”, the most sensitive to the rise and fall of the market, based on good or bad news about the coronavirus, because they will benefit more as life returns to normal. They include
Restaurants in Darden
(DRI), which gained 3.1% last week while providing a bearish revenue outlook,
MGM Resorts International
(MGM), i
Swirl
(WHR).
Of course, there will be reason to doubt that the rotation is real. Last week, the Nasdaq won the Dow by more than two percentage points. Remember, it’s normal too.
More Trader Information: Dogs in the Dow stock collection strategy have not worked this year. It could be 2021.
Write to Ben Levisohn to [email protected]