Over the Thanksgiving holiday, I\u2019d be willing to venture that many dinner conversations included \u2018investing in vaccine stocks,\u2019 or perhaps some chatter about Tesla\u2019s meteoric rise and inclusion into the S&P 500. Others may have discussed the flashy Airbnb and DoorDash initial public offerings (IPOs) that just took place, with some of the younger folks gloating about their new Robinhood trading accounts.<\/p>\n
My point here is that I\u2019m sensing a growing enthusiasm not for investing, <\/em>but for trading. <\/em>The two are different. I see investing as a long-term endeavor, executed in a research intensive and risk-controlled manner consistent with a person\u2019s long-term goals. Trading is what people do in an effort to make fast money, with decisions often based more on hype (vaccines, bitcoin, IPOs) than on research.<\/p>\n When Airbnb and DoorDash went public last week, both stocks were massively oversubscribed, in what appeared to be major buy-in from the retail trading community. Airbnb opened on Thursday at $146\/share, more than double its $68 IPO price and marking one of the biggest opening day rallies ever. This gave the company a valuation over $100 billion, even though for first nine months of 2020 it posted a net loss of $697 million on $2.5 billion in revenues.1<\/sup> Paying a premium for future growth is what investing is all about \u2013 but where\u2019s the limit?<\/p>\n There are a few sentiment models out there \u2013 most notably the Citigroup Panic\/Euphoria Model \u2013 flashing signs of market optimism and euphoria. The American Association of Individual Investors (AAII) found in its most recent December survey that 48.1% of investors identified as being bullish, which is well above the historical average of 38%.2<\/sup> In short, there is growing evidence that investors are becoming more optimistic and confident, which in my view tends to make the market more vulnerable to selling pressure. Seeing as there has not been a correction of -10% or more since the March lows, I think we\u2019re due for one soon.<\/p>\n Indeed, upside volatility tends to invite downside volatility, particularly in areas of the market that performed the best off the bottom (so far in this cycle that\u2019s growth and Technology). I\u2019m seeing a classic tenet of stock market investing playing out now \u2013 just as investors get comfortable with a rally, the equity market finds a way to deliver a reality check. The market never fails to test investor patience, and I think we should expect a sharp pullback in the first half of 2021 to weed-out some of this newfound enthusiasm and optimism.<\/p>\n If a correction does in fact happen next year, it should not come as a surprise. If you look at the S&P 500 over the last 40 years (1980-2020), you\u2019ll find that not only are corrections frequent, they\u2019re the norm<\/em>. The average intra-year correction for the S&P 500 since 1980 is -13.8%! In fact, it\u2019s very rare to get a year where the S&P 500 doesn\u2019t fall at least -5% at some point within the twelve-month period. It\u2019s only happened twice in the last 38 years (1995 and 2017), when the S&P 500 declined just -3% intra-year. 3<\/sup><\/p>\n In 2021, I think we\u2019re going to see a correction more in-tune with the longer-term average, and I think it would be wise for investors to brace for it. Having a diversified portfolio is a good place to start. I think a correction and a subsequent bounce-back could generally favor some of the underperforming sectors and styles in the equity markets, with capital rotating from high valuation names to low valuation names. At Zacks Investment Management, I think our All-Cap Core Strategy could be well-suited for the volatility and rotations I expect next year. We buy stocks with improving fundamentals and sell stocks with deteriorating fundamentals, with no particular allegiance to growth or value or any style. In past years, All-Cap Core has been successful at limiting downside capture, which I think could be valuable to investors in 2021. There\u2019s an old Wall Street adage that investors should \u201cbuy the rumor and sell the news.\u201d In the realm of the vaccine, this adage may have already played out \u2013 investors rushed into stocks on news of the vaccine\u2019s development and approval, and they may end up selling when the vaccine is actually distributed. I think the \u201csell the news\u201d side of the equation will land in the first half of 2021.<\/p>\n At the end of the day, however, an investor with a well-diversified portfolio aligned with their goals should not have much to worry about. A sell-off may provide a strategic opportunity to rebalance your portfolio, or if your asset allocation needs adjusting based on a change to your long-term goals or needs, a correction may be a good time to consider implementing it. Otherwise, I think it is good to mentally prepare for a correction, so you can avoid any knee-jerk reactions when it arrives.<\/p>\n","protected":false},"excerpt":{"rendered":" Over the Thanksgiving holiday, I\u2019d be willing to venture that many dinner conversations included \u2018investing in vaccine stocks,\u2019 or perhaps […]<\/p>\n","protected":false},"author":3,"featured_media":7908,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7973","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7973","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7973"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7973\/revisions"}],"predecessor-version":[{"id":8691,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7973\/revisions\/8691"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7973"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7973"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7973"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nBottom Line for Investors <\/strong><\/p>\n