Ifs, Ands, And Bets

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What's going on?

As governments and central banks scrambled to manage their economies, investors were just scrambling to place a wager on record-breaking global stock and bond markets.

What does this mean?

Global stocks had a scare when Covid-19 first hit, falling more than 20% from their previous high into a “bear market”. But they bounced back with a vengeance when tech stocks – which account for roughly a quarter of the US stock market – got a boost from pandemic-driven trends like remote working and online shopping. By the end of the year, Chinese stocks were up roughly 25% and US stocks were up 15% – while tellingly, Europe’s less tech-heavy markets were down 5%.

Bonds had a good year too: their prices climbed and yields dropped as central banks bought them up in their droves. So much so, in fact, that a record $18 trillion of government and corporate bonds offered negative yields by the end of the year. In other words, investors wanted them even though they were guaranteed to lose them money…

Why should I care?

For markets: Whose high is it anyway?

No sooner have investors digested today’s goings-on than they try to put a price on next year’s potential, which might partly explain stock markets’ recent record highs. 2021, after all, should be ripe for a dramatic bounce back: analysts are expecting average US company profits to grow by 22% – which, if proved right, would be the highest profit growth on record since 2010 (tweet this).

The bigger picture: The big rotation.

There was a lot of debate this year around when cheap-looking “value” stocks – in bruised sectors like cars, energy, and banking – would overtake “growth” stocks like those of Big Tech. And the widespread rollout of the vaccine could be that “when”: it’s already given investors more confidence in a growth rebound next year, which has historically been most beneficial to economically sensitive value stocks.

Originally posted as part of the Finimize daily email.

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