When the overall economy is doing well, companies sell more goods and services, corporate earnings increase, and investors buy the shares of these companies. Unprecedented fiscal and monetary stimulus that supported a sharp economic recovery in the latter half of 2020 helps to explain the very strong investor sentiment that has powered the nearly 60 percent stock market rally off of the March 2020 lows. As markets rise and valuations expand, investor optimism may be pricing in perfection, increasing the likelihood of a market correction. As we note in our 2021 Market Outlook, we believe the economic recovery will remain uneven in the near-term.
There are many indicators, in our opinion, that suggest a near-term market correction is possible. These include high overall stock market valuations, market sentiment that is too bullish (the S&P 500 currently trades about 15% above its 200-day moving average and the latest Investors Intelligence sentiment survey, a contrarian indicator, shows the widest spread between bulls and bears since Jan 2018), recent signs that economic data is starting to slow, increasing COVID-19-related restrictions, and uncertainty around vaccine distribution. Investors have been very optimistic since the last market correction (September 2020) and some of these concerns could easily reverse market sentiment.
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Commentaries are published by Cetera Investment Management LLC, an SEC registered adviser owned by Cetera Financial Group. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.
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