Stocks coming into 2021 – Boom or Bust?

Here are two fun facts from equities in 2020.

· The NASDAQ returned 46% from the start of 2020. If you purchased at the peak of the recessionary period in mid-March, you would’ve made a return on investment of 85%.
· Meanwhile, the S&P500 only returned 17% from the start of 2020.
· The average price/earnings ratio for stocks in the NASDAQ was pushing 23
· The best performing stock that is in the S&P 500 and NASDAQ was Tesla, providing a 743% Return.

With that in mind, what are we expecting for stocks coming into 2021?

Stock Euphoria is at an all-time high
I expect institutional investors (and retailer traders) to take significant money off the table this year if they haven’t already. Given that there was a laggard inflow in capital to US equities in the latter part of 2020 trying to catch the bull run, I expect those inflows to take profit if equities tick up in the earlier part of this year.

With that said, I believe euphoria inequities will continue to rise as the hunt for yield is expected to get more difficult as nations worldwide are predicted to cut rates to take advantage of the economic recovery. Furthermore, lower interest rates significantly affect discount rates for models institutional investors use, favoring equities with longer-dated cash flows – usually associated with value stocks such as banks and telecommunication companies.

Popular stocks that makeup indices are relatively overpriced
When Tesla entered the S&P 500, it had to be indexed in stages because it’s market cap was so large. However, it is equities like Tesla which retailer traders have been inflating. Popular names such as Zoom, Netflix, or any essential “work from home “stock has passed the eyes of retail investors, which eye-watering price/earnings multiples. Netflix continues to trade at an 80x multiple, Zoom at a 274x multiple, and Tesla at an absurd 1,673x multiple.

The issue with overpriced equities is that their influence on the indices’ fluctuations rise as their market cap increases. With the NASDAQ and the S&P 500 based on the companies’ market caps in the indexes, investors in ETFs that track these indices are getting heavily weighted to tracking the large companies in them. With companies such as Tesla being prone to wild swings due to its overprice valuation, anyone holding the S&P 500 will also be prone to the wild swings.

With that said, Goldman Sachs analysts are telling investors to buy stocks on any market weakness, with Peter Oppenheimer saying that the market is in the early stages of a bull phase. “The market is rising on good news but choosing to largely ignore weaker data and rising infection rates.”

Global equities may be more favorable
With extremely low interest rates in the US, which is predicted not to increase anytime in the future, paired with the Coronavirus situation in the United States, large institutions may be wanting to look elsewhere for value – specifically in places where the Coronavirus has been controlled. I believe banks in Australia will benefit from this thesis, as not only are they the parent of New Zealand banks whos economic outlook is looking far better than many other nations in the world, but they also are in an economic environment that is similar to that of New Zealand, Barr a couple of setbacks due to Coronavirus flareups.

I believe we will see another substantial year in equities due to positive sentiment, paired with a recovering economy.