Gain in risk assets will continue, but slower

Investors ended one of Wall Street’s wildest years on record by piling into everything from bitcoin to stock markets, raising expectations that a powerful economic comeback will fuel even more gains.

The vast climb known as the everything rally accelerated late in the year, sending the S&P 500 to its 33rd record of 2020 last week. Following an early-year collapse, the broad U.S. equity gauge, global stocks and an index of raw materials each rose at least 35% from the end of March through the end of the year, only the third time in figures going back five decades that all of those investments have climbed so much in such a short time, according to Dow Jones Market Data. Both of the previous nine-month periods were in 2009 exiting the financial crisis.

The S&P 500 ended the year up 68% from its March lows, after losing more than one-third of its value in about a month. Government bond yields, which fall as prices rise, remain near all-time lows. Meanwhile, corporate bond yields also dropped after early-year turmoil. That means many bond investors ended the year with gains. And U.S. crude-oil prices are back near USD50 a barrel after briefly dropping below USD0 for the first time ever in April.

After the eye-popping rise during a global pandemic highlighted confidence that central banks and governments would prop up the world economy, many investors now expect the delivery of vaccines to buoy markets.

Market still see potential speed bumps on the horizon, including a recent surge in coronavirus cases and a pair of Georgia runoff races this week that will determine which party controls the Senate under President-elect Joe Biden. Democrats winning control could prompt concerns about higher taxes for corporations and investors with capital gains, traders say. Wagers on greater fiscal spending also could hurt bonds and send yields higher.

Yet, many observers still expect ultra-low interest rates to continue supporting bonds while pushing investors to reach for higher-yielding assets. With many U.S. technology stocks at records, many investors are buying shares of economically sensitive companies, commodities and shares of companies in emerging markets, all of which remain below their peaks.

That underscores the increasing breadth of the rally, but lofty projections for both the tech sector and more growth-sensitive stocks remain a concern for some fund managers. We also have to be careful on some of these reopening trades that the sentiment is not already priced in.