From stocks to bitcoin, investors are betting the ‘Everything Rally’ will continue

The S&P 500 ended the year 68% higher than its March low, after losing more than a third of its value in about a month. Government bond yields, which fall as prices rise, remain near historically low. Meanwhile, corporate bond yields also declined after the turmoil at the beginning of the year. That means that many bond investors ended the year with a profit. And crude oil prices in the US are back near $ 50 a barrel after falling briefly below $ 0 for the first time in April.

After the dazzling rise during a global pandemic showed confidence that central banks and governments would support the global economy, many investors now expect the supply of vaccines to the markets.

Polls of sentiment from organizations, including the American Association of Individual Investors, show bearishness at multi-year lows. Meanwhile, tens of billions of dollars have recently been plowed into exchange-traded and stock-tracking mutual funds. Both trends preceded previous downturns, indicating excessive optimism among some cautious investors. Some draw parallels to the excessive profits in late 2017 and early 2018, before trade tensions and higher interest rates stirred the markets.

“Investors can’t take enough risk, whatever it is,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “Momentum is a powerful force, and we don’t want to fight it.”

The company maintains its investments in US stocks in line with the benchmark it tracks and prefers the economically sensitive industrial sector. At the same time, it avoids increasing its equity holdings and maintaining a neutral bond position.

Analysts still see potential speed bumps on the horizon, including a recent surge in coronavirus cases and a few run-out matches in Georgia this week that will determine which party will control the senate led by President-elect Joe Biden. Democrats winning control could raise concerns about higher taxes for capital gains corporations and investors, traders say. Betting on higher tax expenditures can also hurt bonds and make yields higher.

Yet many observers still expect ultra-low interest rates to continue to support bonds, while prompting investors to reach for more yielding assets. With many US technology stocks at record levels, many investors are buying stocks of economically sensitive companies, commodities and stocks of emerging market companies, all of which remain below their peaks.

Their earnings underscore the optimism that the economy will boom in the second half of 2021, even if the coming months pose obstacles to the recovery.

“We really encourage our customers to look beyond the expected turbulence in the first half of 2021,” said Meghan Shue, head of investment strategy at Wilmington Trust. The company has increased its investments in US stocks and emerging markets in recent months.

Companies including Apple Inc.

benefiting from the stay-at-home trend ended the year with astonishing market values, while everything from electric carmaker Tesla Inc.

to copper producer Freeport-McMoRan Inc.

also posted outsized returns.

That underscores the growing breadth of the rally, but high forecasts for both the technology sector and more growth-sensitive stocks remain a concern for some money managers.

“Expectations for certain segments are overcooked,” said Lee Baker, president of Apex Financial Services in Atlanta. He recommends that clients prefer banks and cheaper stocks tied for travel in the new year.

Fund managers polled by Bank of America last month said they had less cash than the benchmarks they follow for the first time since May 2013, another indication that investors are moving money to riskier parts of the market. Many of those surveyed have recently invested more in areas such as emerging markets.

“Those markets have much more recovery potential,” said Michael Kelly, global head of multi-asset at PineBridge Investments. He has favored emerging markets as well as French and Spanish equities in recent months, believing that a revival in global growth, aided by government stimulus, will help them perform better.

Investors have been particularly encouraged by recent economic data showing that the Chinese economy is moving forward after the country largely contained the coronavirus, a boon for other emerging markets and commodity producers. Analysts now hope that the US and Europe will catch up.

Even with the worsening pandemic in those regions, economic data has remained broadly stable, with the introduction of vaccines giving consumers and businesses more confidence.

That is also contributing to the major recovery in stocks associated with pandemic sectors, including travel and leisure, but some investors are wary that those companies will fall short of high expectations as the recovery unfolds.

“You have to be careful with some of these reopening trades where sentiment isn’t already priced in,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments. She prefers high-growth companies tied to technology infrastructure and waiting for a downturn to strengthen her positions.

Write to Amrith Ramkumar at [email protected]