Dow tumble from record highs on nerves over Georgia runoff elections
U.S. stocks closed 2020 on a strong note, and many investors are betting the party will continue after a tumultuous year that marked both the end of the longest bull market and the shortest-lived bear market ever.
Risks abound, including a resurgent coronavirus pandemic, concerns about the speed of rollout of vaccines and high-stakes Jan. 5 U.S. Senate runoffs in Georgia for the balance of power in Congress. Still, many investors are looking past these threats.
“We are going to continue to see a push higher,” said Commonwealth Financial Network’s 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 December, likely due to the Georgia elections. If Republicans win at least one Senate seat, they will maintain a slim majority.
If Democrats sweep the dual runoffs, the chamber would be split 50-50 and the tie-breaking vote would go to Vice President-elect Kamala Harris, giving President-elect Joe Biden’s party full sway over Congress. That raises the possibility of tax-reform proposals that many investors fear would hurt stock prices.
Still, most investors are not looking for a sharp pullback next year. BofA Global Research’s December fund manager survey was the most bullish.
The roll out of coronavirus vaccines has emboldened investors, along with the U.S. Federal Reserve’s expressed readiness to keep policy accommodative, strategists said.
Indeed, the U.S. stock market’s rally over the last two months may have taken even bulls by surprise. A late November poll found 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.
The year 2020 was a wild one for Wall Street, bookended by the end of the longest bull market in history with the battering of equities by the COVID-19 shutdowns, and a bungee-cord rebound on hopes for economic recovery that resulted in the shortest bear market on record.
In prior bull markets, when the S&P 500 takes out its previous bull market high, the index has experienced a median gain of 38% over the span of 26 months before topping out, according to Bespoke Investment Group data.
Some investors fret the COVID-19 recovery may already be priced in and valuations may be stretched. The 12-month forward price-to-earnings ratio of the S&P 500 is currently about 22, well above its long-term average of 15.
Still, investors see several parts of the market, including financials, leisure and hospitality stocks and energy with potential to rally.
“The market, overall, does not seem overbought,” said Tim Ghriskey, chief investment strategist at Inverness Counsel.