The U.S. market is in great shape as 2020 comes to a close, thanks mainly to the signing of a U.S. stimulus deal, a super-dovish Fed, vaccine rollouts and dissipating global growth worries. The S&P 500, the Nasdaq and the Dow Jones hit all-time highs on Dec 28 as Santa Claus rally took Wall Street in its grip.
Perfect Setting for a Santa Rally
Santa Claus rally refers to the jump in stock prices in the week between Christmas and New Year's Day. There are several factors behind this surge including "tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week" per Investopedia.
In fact, some even believe that investors buy stocks during this period to cash in on another strong equity event, known as the January Effect, which takes place soon after. According to Stock Trader’s Almanac, there has normally been “a short, sweet, respectable rally within the last five days of the year and the first two in January.”
Over the past 50 years, stocks have ended this period higher 77.9% of the time, and with an average gain of 1.33% for one of the best seven-day periods of the year, according to LPL Financial,
as quoted on Yahoo Finance.The current market movers indicate a perfect Santa Clause rally. Are Stocks Overvalued?
The S&P 500 has been in great shape in the fourth quarter due to back-to-back vaccine efficacy news. The second round of pandemic-relief stimulus has also given another boost. After astounding gains, thoughts of a correction in the market or overvaluation concerns are justified, especially with so much of global debt around.
The latest stock market rally can largely be attributed to global policy easing. It is important to note that the combined size of the balance sheet of the Fed, BoJ, the ECB and the PBOC is stretched to the level of
$27.9 trillion in November 2020, up from just $5 trillion in 2007.
This indicates the central banks’ limited power of further balance sheet expansion from here. Without the central banks’ support, upbeat economic and corporate earnings growth are necessary to prolong the rally.
Vaccine Hopes: Major Market Tailwind
Having said all, we would like to note that 2021 could see a trend reversal from 2020 as vaccine rollouts will likely bring life to normalcy and economic growth will pick up.
The International Monetary Fund forecasts that the global economy could contract 4.4% this year, before recoiling to 5.2% growth in 2021. The IMF said in October that the world economy has started to recover, but cautioned about uncertainty too.
Meanwhile, a new virus strain has erupted in the United Kingdom. Restrictions (though not very stringent) have flared up all over again. The Organisation for Economic Co-operation and Development said that in some countries, the initial impact of COVID-19 on labor markets were “ten times larger than that observed in the first months of the 2008 global financial crisis,”
as quoted on CNBC. Why Should We Bet on High-Beta ETFs With Value?
Since we are poised to see a market rally in 2021, high-beta ETFs are expected to gain handsomely. Beta is directly related to market movement. Notably, high-beta funds tend to rise or fall more than the stock market and are thus more volatile.
But the above discussion indicates that while taking a risk-on move, caution should also be exercised. Below we highlight a few ETFs that have a beta greater than 1.0, P/E below 24 times of
SPDR S&P 500 ETF Trust ( SPY Quick Quote SPY - Free Report) and one-month price gains of at least more than the S&P 500 (up 3.2%). Invesco S&P 500 Equal Weight Technology ETF ( RYT Quick Quote RYT - Free Report)
P/E: 20.88x; Beta: 1.16x; Zacks Rank #2 (Buy); One-Month Performance: 5.45%
SPDR S&P Retail ETF ( XRT Quick Quote XRT - Free Report)
P/E: 15.15x; Beta: 1.45x; Zacks Rank #2; One-Month Performance: 6.94%
SPDR S&P Biotech ETF ( XBI Quick Quote XBI - Free Report)
P/E: 8.48x; Beta: 1.43x; Zacks Rank #2; One-Month Performance: 19.14%
iShares U.S. BrokerDealers & Securities Exchanges ETF ( IAI Quick Quote IAI - Free Report)
P/E: 16.79x; Beta: 1.13x; Zacks Rank #3 (Hold); One-Month Performance: 6.96%
Vanguard S&P SmallCap 600 ETF ( VIOO Quick Quote VIOO - Free Report)
P/E: 20.50x; Beta: 1.28x; Zacks Rank #3; One-Month Performance: 5.02%
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