CNN Business/Paul R. La Monica
2021 could be a tougher year for stocks

If you had said at the start of 2020 that the economy would shut down, the unemployment rate would skyrocket and earnings would plunge due to a highly contagious and lethal virus and we’d still end the year with stocks near all-time highs, people would think you were crazy.

Heading into 2021, investors are optimistic about stimulus from the incoming Joe Biden administration, more help from the Federal Reserve, relief as Covid-19 vaccines are administered to millions and — most hopefully — a return to some kind of normal.

There’s no guarantee that this scenario will play out. Stocks have gone up so much this year that all of 2021’s good news may be priced in and then some. It could be harder for stocks to keep climbing.

The Dow, S&P 500, Nasdaq and Russell 2000 all hit new record highs on Friday. The S&P 500 is up nearly 15% this year while the Nasdaq has soared an astonishing 40%.

Still, that trajectory may not continue.

“The market has priced in a recovery from Covid-19 to some extent and a new peak in earnings. If the world doesn’t return to normal investors will be disappointed,” said Brad Neuman, director of market strategy with Alger, in an interview with CNN Business.

All the good news for next year already priced in?

Expectations for a profit rebound in 2021 are now sky high. According to estimates compiled by FactSet, analysts are forecasting a more than 15% increase in year-over-year earnings for the first quarter, a nearly 45% jump for the second quarter and 22% rise for all of 2021.

Those projections may be unrealistically bullish, said Barry Bannister, head of institutional equity strategy with Stifel. Bannister told CNN Business that his earnings forecasts for 2021 are 11% below Wall Street’s consensus estimates — which also put earnings below pre-coronavirus levels in 2019.

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Fox Business/Jonathan Garber
Record stock levels raise ‘groupthink’ worries

Stretched investor positioning is the latest worry on Wall Street as the stock market continues its ascent to record highs amid a renewed spike in COVID-19 infections.

The benchmark S&P 500 has rallied 14% since bottoming on Mar. 23 as investors have looked ahead to a COVID-19 vaccine and a normalization of the U.S. economy.

“Stretched positioning typically represents a headwind to short-term equity market returns when economic growth is stable or decelerating,” wrote a Goldman Sachs research team led by Arjun Menon, vice president of U.S. equity strategy. “The recent surge in COVID-19 hospitalizations and weaker-than-expected economic data therefore increase the risk of modest positioning-driven pullback in the next month.”

The firm’s Sentiment Indicator found positioning in the stock market, boosted by $52 billion of investor capital flowing into mutual funds and exchange-traded funds, was two standard deviations above average and in the 98th percentile of readings since 2009.

A resurgence of the virus has resulted in a slowdown in the economy with a record 101,487 patients hospitalized Sunday due to COVID-19. The resurgence of the virus has caused some states, like California, to reintroduce lockdowns to help slow the spread. Others, including Illinois, have rolled back their reopening measures with New York warning indoor dining may be reversed in the coming days.

The recently imposed restrictions will likely further weigh on an economy that has for six consecutive months experienced a drop in the number of new jobs. The latest readings on consumer sentiment and retail sales also suggested the economy is slowing from the record 33.1% growth experienced in the second quarter of this year.

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CNBC/Lizzy Gurdus
Even with a Covid vaccine, U.S. economy will likely get worse before it gets better: Ned Davis Research

We still haven’t seen “the storm before the calm.”

So says Alejandra Grindal, senior international economist at Ned Davis Research, despite the market’s run to record highs, reignited Tuesday by positive announcements around a Covid-19 vaccine.

The U.K. began rolling out Pfizer and BioNTech’s vaccine to its citizens Tuesday, just as the U.S. Food and Drug Administration said the vaccine raised no specific safety concerns.

Even so, “things will get worse” before they get better, Grindal told CNBC’s “Trading Nation” on Tuesday.

“We could see things get a little worse in Q1, especially if the virus gets worse and worse, lockdowns stay longer and we don’t get a renewal of that stimulus” that Congress passed in March, she said.

While a U.S. vaccine rollout in the second quarter of 2021 would likely spark a bigger turnaround, the key will be getting through the next three months, Grindal said.

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Reuters/Marc Jones
Morgan Stanley takes some ‘chips off the table’ after emerging market surge

U.S. investment bank Morgan Stanley said on Monday it was taking “a few chips off the table” after a thundering rally in emerging markets over the last month.

The bank said it was sticking to its core view that developing economy currencies and select countries’ bonds would continue to climb, but was dialling back its bullish bets after November’s surge.

That included closing long positions on South Africa’s rand, which has surged 13% since June, tightening stop-losses on Latin American currencies like Brazil’s real and Mexico’s and Colombia’s pesos, and chopping back a bunch of bond bets including in Egypt and Ukraine.

“We see the rally in EM (emerging market) currencies being front-loaded into year-end and 1Q21, but then petering out,” Morgan Stanley’s analysts said. “We are also neutral on EM credit, where we think that spreads are close to bottoming out.”

They said they were watching China’s credit cycle particularly closely.

“China could be the first among the major economies to start applying the brakes next year” in terms of stimulus, Morgan Stanley added, “and, when it does, markets will likely pay attention.”

The currencies of commodity-producing countries are likely to suffer as they generally rally as China’s credit impulse intensifies and depreciate as it wanes.

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