The S&P 500, Dow Jones, and Nasdaq indices all finished
2020 at or near all-time highs.1 What’s more, “risk-on” sentiment
also ended the year with somewhat of a bang – investors borrowed a record
$722.1 billion on margin through November 2020, and individual investors opened
more than 10 million new brokerage accounts in 2020 (a record). The Wall Street Journal also reported that the
online trading platform Robinhood, which targets millennials and younger
investors, saw 500,000 downloads in December alone.
In short, I think many investors are rushing into capital markets
and taking-on excess risk in the process. Stories of 100+% gains, cryptocurrency
rallies and huge gains in IPOs are all pushing optimism higher, which has
historically been ominous for equity markets.2 As optimism grows, I
think we also move closer to the possibility of pullbacks and more frequent bouts
of volatility.
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Are You Prepared for Volatility in 2021?
2021 has the potential to be the year that the economy takes
an upward turn. But these all-time highs can also be seen as a warning sign for
more volatility in the future. The key is for investors not to give into the
negative narrative as market predictions and uncertainties steadily rise.
Having uncertainties and doubt are normal, but instead of focusing on these
uncertainties, I recommend focusing more on the hard data and economic
indicators that could impact your investments in the long-term is important.
It’s better to focus on the facts and data when it comes to making future
decisions!
To help you do this, I am offering all readers our
just-released Stock Market Outlook report. This report contains some of our key
forecasts to consider such as:
- A look at the current Covid-19 situation and its impacts
- U.S. returns expectations for 2021
- Update on U.S. fiscal stimulus
- U.S. earnings and GDP growth rates in 2020 and what to expect for 2021
- Zacks Rank S&P 500 Sector Picks
- What produces 2021 optimism?
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released Stock Market Outlook Report3
_________________________________________________________________________
If you agree with me, your next thought may be to try and
anticipate a market top. Longer-term investors may even argue that identifying
market ‘frothiness’ could create an advantageous trade: by getting out of the market near the top,
you can swoop in and “buy the dip” later. While I agree in principle with this
strategy, I don’t think it is viable and, in fact, would urge investors to
avoid trying it. Market timing rarely works, and over time it usually hurts
total returns more than it helps.
At the end of the day, no one can truly know when the stock
market will shift into pullback or correction mode. I personally thought the
stock market was due for some kind of pullback in Q4 2020, but it never
happened. The market rallied, and our equity strategies at Zacks Investment
Management were positioned to participate. I don’t let gut feelings determine investment
strategy.
Long-time investors know that market corrections and bouts
of volatility are normal and common, but we do not and cannot know when they
will arrive or how long they will last. If anyone tells you ‘with certainty’
when market downside is coming and how long it will last, my advice is to run
the other way.
In the current environment, I fully agree areas of the
market are frothy and the “risk-on” sentiment has me convinced we’re due for a meaningful,
-10% to -20% correction in 2021. But I would never try to predict when the correction will arrive and what
it’s actual magnitude will be. If I tried, I’m sure I’d get it wrong. Almost
everyone would.
My long-term goal is to capture as much upside as the broad
equity markets have to offer, and the most effective way to accomplish this
goal is to invest alongside growing earnings and an expanding economy. In 2021,
I believe we will get both. Economic growth should be robust in the second half
of the year, and we feel strongly that year-over-year earnings growth (particularly
in value and cyclical categories) will pop coming off dreadful comparisons in
2020. Earnings estimates should continue to improve as the vaccine rolls out
and as the fog of the pandemic clears.
Growth will be uneven at first, and many corporations will
still feel intense pressure in the first half of the year. With the market
still reaching all-time highs anyway, many investors may be tempted to get out
and to stand ready to buy the dip. I don’t recommend it – remember, it’s also
the first full year of a new bull market, and based on what I see today, I do
not want to risk being on the sidelines for any part of it. Trying to time the
markets rarely works.
Bottom Line for
Investors
In the current environment, I can see how all-time highs
might seem like a warning signal, particularly with growing optimism and high
valuations in some key areas. But I would caution against seeing all-time highs
as a rationale for trying to time a market top. After all, the stock market
could very well rally +30% before delivering the much-anticipated -10%
correction, which would entirely defeat the purpose of buying the dip.
If you want to capture the economic and earnings growth 2021
is poised to deliver, then my advice would be to own stocks – not to buy and sell them based on predictions about
market tops and corrections.
So instead of trying to time the market, stay focused on what matters – key data points and economic indicators that could impact your investments. To help you do this, I am offering all readers our Just-Released Stock Market Outlook Report.
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:
- A look at the current Covid-19 situation and its impacts
- U.S. returns expectations for 2021
- Update on U.S. fiscal stimulus
- A look at U.S. earnings and GDP growth rates in 2020 and what to expect for 2021
- Zacks Rank S&P 500 Sector Picks
- What produces 2021 optimism?
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure
1 Market Watch. December 30, 2020. https://www.marketwatch.com/story/stock-futures-signal-wall-street-set-to-take-another-shot-at-records-as-2020-winds-down-11609330503?mod=markets
2 Wall Street Journal. December 27, 2020. https://www.wsj.com/articles/investors-double-down-on-stocks-pushing-margin-debt-to-record-11609077600?mod=djem10point
3 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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