CNN Business/Anneken Tappe
Stocks reverse course after hitting new record highs
Wall Street reversed course on Tuesday, with stocks pulling back one day after reaching new record highs.
Stocks soared Monday after early results from Moderna (MRNA)’s Covid-19 vaccine trial indicated its vaccine is highly effective, giving investors plenty of opportunity to take some profits. Both the Dow and the S&P 500 closed at all-time highs, with the Dow ending just 50 points below the 30,000 mark.
But the exuberance faded Tuesday as investors faced a hard fact: While vaccines against the virus are good news for the medium- and long-term, they make little difference for the here and now.
Given the resurgence in infections around the world, the winter is expected to be tough for businesses and various US states have already ramped up their restrictions on public life once again.
The Dow (INDU) closed 0.6%, or 167 points, lower, after tumbling as many as 430 points earlier in the day.
The S&P 500 (SPX) closed down 0.5%. The Nasdaq Composite (COMP) managed to turn green during the session, but ended up closing 0.2% lower.
Economic data on Tuesday also showed October retail sales missed expectations, and economists are worrying about lower consumer spending in the winter months which could be bad news for the economy.
Meanwhile, various programs designed to relieve economic hardship for workers who found themselves jobless as a result of the crisis will expire at year-end. This benefits cliff is looming over the start to President-elect Joe Biden’s term in January.
Federal Reserve Chairman Jerome Powell reiterated his comments from last week at an event Tuesday afternoon, saying that we won’t recover back to the pre-pandemic economy but rather a new, different economy. But the market shrugged off his comments.
Fox Business/Jonathan Garber
Record stock rally faces risks from civil unrest, tech bubble
Big money managers are growing concerned that civil unrest could upend the stock market rally, but remain more worried about the impact of the COVID-19 pandemic, according to a Bank of America survey conducted in November.
A net 15% of respondents said civil unrest was the biggest “tail risk” to markets, trailing only COVID-19 (41%) and the tech bubble (19%). No respondents mentioned social upheaval as a concern in October’s survey.
The Charlotte-based lender surveyed 190 participants with $526 billion in assets under management between Nov. 6 and Nov. 12. The survey was conducted amid a resurgence in new COVID-19 cases and as the certification of the 2020 election hung in the balance following a flurry of lawsuits filed by the Trump campaign.
“Reopening rotation can continue in Q4 but we say ‘sell the vaccine’ in coming weeks/months as we think we’re close to ‘full bull,’” wrote Michael Hartnett, chief investment strategist at Bank of America.
As money managers continue to pull forward their timing for a “credible vaccine” up to January from February, their cash balances have fallen to 4.1%, the lowest since before the COVID-19 pandemic. A reading below 4% would trigger the bank’s “sell signal.”
Investors have used their cash to rotate into emerging markets, small caps, value and banks. Favorite trades for 2021 include emerging markets, the S&P 500 and oil. A net 65% said long technology stocks remain by far the “most crowded” trade.
Risks to the bull market include a record-high percentage of investors expecting the yield curve to steepen (73%), the highest allocation to equities (net overweight 46%) since January 2018 and lowest allocation to cash (net 7%) since April 2015.
The 60-40 portfolio concept is ‘broken’ as bonds face headwinds, Van Eck CEO says
Low interest rates are eroding one of Wall Street’s long-standing investment principles.
The traditional 60% stock, 40% bond portfolio — a popular allocation strategy meant to generate steady income while guarding against volatility — is falling out of style, Van Eck Associates CEO Jan van Eck told CNBC’s “ETF Edge” on Monday.
“The phrase we’ve been talking about with clients is ‘the 40% is broken,’ meaning the 40% of your portfolio that’s supposed to be in bonds,” the CEO said.
The main culprit is low interest rates, according to van Eck. The yield on the U.S. 10-year Treasury bond has fallen from some 1.8% a year ago to just under 0.9% as of Tuesday, a huge hit to its effectiveness as a hedge against market turmoil.
“Institutional investors, advisors, individuals, no one wants to own a bond with that low an interest rate,” van Eck said. “You can’t make any money [on] that over any kind of time horizon.”
That rationale has been contributing to outflows from bonds and bond-based exchange-traded funds in recent months, even as the overall ETF industry just surpassed $5 trillion in assets for the first time.
“Investors have been fleeing bonds,” van Eck said. “Balances at Merrill Lynch are down 49% in terms of their bond holdings over the last several years. So, everyone’s running away from the 10-year and trying to find alternatives.”
As that drives investors to consider hedges such as gold, it will likely slow the bond story, the CEO said.
Gold fund manager ‘fully invested’; inflation, geopolitical risks to remain
The gold market is experiencing a crosswind of economic forces, but the main tailwinds of inflation and geopolitical risks are still intact, said Sean Fieler, CIO of Equinox Partners.
“I don’t think the Republicans are going to be aggressively in the business of cutting spending, they weren’t under the Trump Administration, I think it’s going to be hard to position themselves that way in a Biden Administration. On the other reason they would put through tax increases. With the Fed monetizing the deficits no matter how large they are, why Republicans would go along with tax increases, is difficult to fathom for me,” he said.
Geopolitical risks are expected to remain high during a Biden Administration, Fieler said.
“I think we’ll see that a Biden Administration will be significantly more hawkish than what we saw from the Trump Administration,” he said.
On inflation, the Federal Reserve’s underestimating rising prices is a mistake, Fieler said.
“They’re just not that concerned about inflation and they are very concerned about unemployment,” he said.