Risks and opportunities are always present for investors, particularly in the stock market. Even in a recession or a bear market, there are stocks that will be winners. However, there’s no getting around the fact that macroeconomic forces can play a big role in which stocks will be winners and losers.
Currently, there are a number of global, national and even sector-specific factors that may create winners and losers in the coming months. Here’s a look at some of the bigger risks and opportunities that you may want to discuss with your financial advisor to see what changes, if any, you could make to your portfolio.
Risk: Delays/Problems With Vaccine Rollout
The biggest macroeconomic risk for investors, particularly stock market investors, is that the vaccine rollout doesn’t go as anticipated. Optimism in the market has been predicated to a large degree on the successful rollout of the vaccine across America and the world, helping global economies get back to normal. If there’s any type of problem with the vaccines that triggers a return to shutdowns and stay-at-home orders, the effects could be disastrous for investors.
Opportunity: The Reopening Trade
The so-called “reopening trade” has already been working, as investors anticipate a successful vaccine rollout. As coronavirus cases are already trending downwards, the reopening trade may very well continue. The closer the economy gets back to fully reopening, stocks that benefit from the return of consumers should thrive. Industries that should benefit from reopening include travel and leisure stocks, financials, energy stocks and consumer discretionary stocks. Disney, Citigroup and American Airlines are examples of these types of names.
Risk: Rising Interest Rates
There’s no doubt that the stimulus payments made directly to individuals in 2020 and 2021, plus the promise of an additional $1.9 trillion in stimulus, have helped the economy avoid a severe recession. However, there’s certainly a risk that this much money being thrown into the economy could trigger inflation and/or rising interest rates. Sharply rising rates or inflation could kill any recovery, and the stock market, as a leading indicator, is likely to react first. Rising rates could also slow the housing recovery, which kicked into gear in 2020 on the back of record-low mortgage interest rates.
Opportunity: Bank Stocks
Bank stocks could be a good opportunity for investors for a number of reasons. If the vaccine deployment is successful and the economy fully reopens, loan activity is likely to pick up. This is a huge source of revenue for banks. Also, if the economy picks up and interest rates start to tick up, this is also good for banks, as they make money on the spread between short-term and long-term interest rates. With the Fed committed to keeping rates low at least into 2023, rising interest rates on the long end could be another big source of revenue for banks.
Risk: Reddit Stocks
The stock market in early 2021 has been riled up by a so-called army of Reddit traders who share stock ideas online and then “attack” various stocks, particularly those with large institutional short positions. GameStop, AMC Entertainment and others have seen wild swings in their stock prices as these Reddit traders try to squeeze out the shorts and reap immense gains. GameStop, for example, traded up 400% in just a matter of a few days in February 2021. Although it might be fun to think about what great profits were to be had, remember the other side of that equation: GameStop subsequently dropped from a 52-week high of $483 back down to the $50 range in a matter of days. This type of rampant speculation brings immense risk to a portfolio, and long-term investors should go nowhere near these types of stocks.
Opportunity: Cyclical Stocks
Rather than trying to chase a stock touted on the internet, it’s best to do your own research and invest for the long term in quality companies in overlooked sectors. While Reddit-fueled speculation has taken all the headlines, cyclical stocks are slowly starting to make their own waves. Cyclical stocks get battered when the economy slows, as evidenced in 2020, but when the economy recovers, cyclical stocks often lead the market. If you’re a believer that the vaccine rollout will go as planned and the U.S. will experience a booming economy in 2021, you’ll want to pick up some cyclical stocks, as they perform best during economic expansions. Examples of cyclical sectors include restaurants, automobiles, manufacturing and retail.
Find Out: 10 Stocks Set To Soar in 2021
Risk: Global Tensions Rise
There’s a new sheriff in town in the White House, and this can always lead to a change in foreign policy. Barely one month into the new Biden administration, the U.S. has conducted airstrikes against Syria, and global uncertainty regarding Russia, China and other countries could result in economic and perhaps even military flare-ups. Anything but smooth sailing regarding foreign policy could translate to a sell-off in the stock market, which is a big fan of the status quo.
Opportunity: Emerging Market Stocks
Emerging market stocks have always held lots of promise but have suffered through more than a decade of underperformance versus the S&P 500 index. Recently, however, the U.S. dollar has been falling in value, and that’s often a precursor to outsized relative emerging market returns. Since the pandemic became widespread in March 2020, the U.S. dollar has fallen about 10%. If the dollar were to continue weakening, which Barron’s suggests could happen if the American economic recovery remains sluggish, emerging market stocks could flip the script and begin to outperform the S&P 500. As these types of stocks have underperformed and can carry a high risk, be sure to consult with your financial advisor before investing.
Risk: Tech Bubble
Some of the biggest and most well-known names in technology enjoyed solid returns in 2020, and many are off the races to start 2021 as well. Valuations in the tech sector are as stretched as ever. According to Reuters, the S&P 500 is now the most expensive developed market index in the world, based on the P/E ratio, trading at levels not seen since the late 1990s dot-com bubble. As just six tech stocks — Apple, Microsoft, Amazon, Facebook, Netflix and Alphabet — now comprise about 24% of the S&P 500 index, with Apple and Microsoft alone comprising about 11.6% of the index. The index is clearly tech-heavy and susceptible to any compression in tech stock.
Opportunity: Value Stocks
Value stocks are those that are out of fashion, trading for below what some investors perceive as their intrinsic net worth. Typically, value stocks are found in long-established industries like energy, utilities or banking. Names like these are often overshadowed by flashier tech stocks, like Amazon or Netflix, and indeed the performance of growth stocks has trounced that of value stocks over the past decade. In 2020, this divergence of performance was the greatest on record, with growth stock funds outperforming value funds by an incredible 32%. If you’re a contrarian investor, you have to anticipate this wide divergence to trend back toward the mean, making value stocks an interesting play here.
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