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Nicklaus: Stock market sets records as it looks past a worsening pandemic

Nicklaus: Stock market sets records as it looks past a worsening pandemic

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Wall Street taps the brakes following its record-setting run

A man wearing a mask passes the New York Stock Exchange Nov. 16. Stock markets are rallying on news that a second coronavirus vaccine shows promise. 

If someone told you last New Year’s Day that the stock market would post double-digit gains by November, you’d probably have expected a good year for the economy.

Such a scenario typically doesn’t include a recession, rising unemployment or a pandemic that forces mass shutdowns of businesses. Yet, here we are: As of Friday, in a year that has seen all those bad things happen, the Standard & Poor’s 500 index is up 10.1% for 2020.

Stocks rocketed to new highs in recent days even as the pandemic was setting records of its own for new infections and hospitalizations. That might seem odd unless you understand one thing about the market: It quickly forgets what happened yesterday and cares only about tomorrow.

“The vaccine news has really encouraged people,” said Bill Hornbarger, chief investment officer at brokerage firm Benjamin F. Edwards. “The market is looking forward into next year, saying we’re going to get a handle on this disease at some point.”

Encouraging vaccine results from Pfizer, Moderna and AstraZeneca came on top of a relief rally following the presidential election. The market wasn’t necessarily rooting for Joe Biden to win, but it was glad to leave political uncertainty behind.

“The stock market is like Wayne Gretzky: It skates to where the puck is going to be, not to where it is now,” said David Presson, director of investments at First Bank. “I do think this rally is justified, and it still has legs.”

Back to that Jan. 1 comparison: Is corporate America’s earnings outlook actually brighter than it was when 2020 began?

For some companies, it is. The work-from-home trend has made us more dependent than ever on technology, and five tech giants — Apple, Microsoft, Amazon, Alphabet and Facebook — make up 23% of the S&P 500’s value.

Strong performers in the last couple of weeks, though, include smaller companies and industries that were hit hard by the pandemic, such as airlines and banks.

Presson sees that broadening of the market as a healthy sign. “These value stocks have been out of favor for so long,” he said. “People are seeing a possibility of an effective vaccine making it OK to get back to work, so some of these out-of-favor sectors can start doing better.”

Besides the virus, the big event for financial markets in 2020 has been lower interest rates. The Federal Reserve cut short-term rates to zero in March and has signaled that they’ll stay there for years.

Low rates boost stock prices in two ways. Companies are more profitable because they pay less to borrow money, and low-yielding bonds become less attractive as an alternative to stocks.

“The valuation of stocks is predicated on interest rates,” said Joe Terril, who runs investment firm Terril & Co. “When central banks all over the world cut interest rates to zero, it makes stocks more valuable, especially if you think that by next summer companies will be doing as well as they were in January or February.”

To be sure, the road ahead could be bumpy. Distribution bottlenecks could slow vaccination efforts, and a gridlocked Congress could refuse to approve more relief for small businesses and the unemployed. Terril also sees a chance that rising inflation might force the Fed to raise interest rates sooner than it wants to.

For now, though, the market sees the risks as manageable and the future as bright. This year certainly has tested investors’ nerves, but it also has rewarded their patience.

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