How do Wall Street investors invest

Wall Street 2021: continue from record to record?

It's paradoxical. While the number of new corona infections is increasing inexorably, worries seem to be evaporating on the leading US stock exchanges. Optimism has spread in the financial markets in the past few weeks, which is increasingly turning into euphoria. Even negative pandemic developments have long since been largely priced in by investors.

Experts say that it is the growing hope that the economy will normalize that drives the markets. "The major vaccine breakthroughs in November and December reduced uncertainty," writes Janet Henry, chief economist at HSBC, in her equity outlook. More and more investors are positioning themselves now to benefit from an economic recovery in the future. The fear of missing low entry prices is pressing on investors.

The majority of the major fund and investment houses are also looking to the coming year with optimism. Both the financial services provider Piper Sandler and the investment bank Oppenheimer and the major bank JP Morgan are predicting a significant boost for the S & P500, America's largest benchmark index. In the next twelve months he could make a big jump over the mark of 4,000 points, that would be an increase of up to 18 percent from today's perspective. Comprehensive fiscal packages, further central bank injections and the accompanying economic recovery are named by the analysts as price drivers.

Comeback with a headwind

The markets' comeback is unlikely to continue without headwinds, the financiers believe. The news about the vaccine is positive, according to a report at BMO Capital Markets, but both the pandemic and its unprecedented effects will not go away overnight.

Tobias Levkovich, chief investment strategist at Citigroup, believes that the US economy will initially face significant weaknesses in the face of renewed lockdowns. "The vaccines do give hope for a future normalization, but first of all a hard winter threatens," writes the expert in his annual outlook.

In the USA, the vaccination increases the hope of normalcy - this also affects the financial markets

Politics creates uncertainty

The designated US government is also causing uncertainty - at least for now. It is still unclear which party will control the Senate and thus the entire legislature. Two runoff elections in Georgia are set to decide the race in early January.

The markets are hoping for a victory for the Republican Party, which would significantly weaken Biden's progressive reforms. "Wall Street is hoping that Republicans will keep at least one seat and thus a majority in the Senate so that taxes don't rise and companies are threatened with too much regulation," said financial analyst Scott Garliss of Stansberry Research.

Above all, the tech and pharmaceutical sectors could take a sigh of relief for the time being. You would have to fear neither a breakup nor much stronger drug controls.

Energy sector hopes for recovery

The oil and gas industry would also benefit if Trump's pro-business policies survived in the coming administration. Their continued existence would be temporarily assured if the environmental regulations announced by Biden were not implemented.

In any case, the oil sector is facing a splendid year, according to the major Swiss bank UBS. For the year as a whole, the industry is still a whopping 38 percent in the red. But that is precisely why the upside potential is particularly high here. Like all cyclicals, i.e. particularly cyclical companies, the energy sector should also benefit from the ongoing recovery of the global economy, believes UBS strategist Keith Parker. With increasing consumption and rising production, the oil demand will be fueled significantly in 2021.

Search for the true values

It is not just the energy industry that is fueling a trend that has established itself on the markets since the first positive vaccine news at the latest. The so-called sector rotation is increasingly driving investors away from overheated tech stocks and towards significantly cheaper value stocks. These are companies whose market value is well below their book value.

The US leading index Dow Jones had already ironed out the corona crash in November

"As the economy rallies, value stocks will come back much faster," predicts Garliss, who spent more than 20 years on Wall Street. There they are already investing in the corresponding securities because the stock exchanges are thought to be six to eight months ahead of reality.

When looking for particularly well-performing companies, investors shouldn't be blinded by the stock market heavyweights. Large companies in particular have long since priced in a large part of the economic recovery in their prices, which makes their shares comparatively expensive.

The small caps, on the other hand, companies with a maximum market value of $ 500 million, are in a better position here, not only because they are comparatively cheap, says Garliss. "In contrast to the large US corporations, small caps generate up to 75 percent of their sales in the USA, where consumption is likely to increase more strongly in the coming year than overseas."

A comparison with the major US leading indices shows that this year the Russell 2000, the index with America's second-tier stocks, rose three times as much as the S & P500, for example. The small caps benefit above all from digitization. Robotics, artificial intelligence and big data, which have long been standard in many large companies, are only yet to become margin drivers there.

Individual values ‚Äč‚Äčinstead of funds

Experts recommend that anyone who wants to benefit from the developments should take a very close look at the individual values. Instead of relying on passive index funds as in previous years, the focus in 2021 will be on so-called stock picking, i.e. the targeted selection of stocks.

"Investors will need to focus on company and sector fundamentals to get results, which is why we expect actively managed strategies to outperform those passively investing in an index," said Lisa Shalett, Morgan's chief investment officer Stanley. Successful investing could require shifts in wealth structuring, sector, geography and stock selection.

Bitcoin, the oldest and most important cyber currency, is also doing well

In addition, non-American stocks are likely to perform significantly better in the future. "China could become the world's largest economy in the next few years, so companies that trade with China could thrive," Shallet believes. The cheapest buying opportunity will be found in emerging markets, where valuations are currently still attractive in contrast to the USA

But in the US, too, it should end up being a relatively successful year on the stock market, at least statistically speaking. In the first two years of a new bull market, shares gain a good 65 percent, according to analyzes by asset manager LPL Financial. "We assume that 2021 has the potential to be one of the best years in terms of earnings growth, which will also contribute to higher share prices," writes Brian Belski of BMO Capital Market in his stock market forecast. However, only those investors who select their stocks very carefully in the future should benefit from this.