Over the Thanksgiving holiday, I’d be willing to venture that many dinner conversations included ‘investing in vaccine stocks,’ or perhaps some chatter about Tesla’s meteoric rise and inclusion into the S&P 500. Others may have discussed the flashy Airbnb and DoorDash initial public offerings (IPOs) that just took place, with some of the younger folks gloating about their new Robinhood trading accounts.

My point here is that I’m sensing a growing enthusiasm not for investing, but for trading. The two are different. I see investing as a long-term endeavor, executed in a research intensive and risk-controlled manner consistent with a person’s long-term goals. Trading is what people do in an effort to make fast money, with decisions often based more on hype (vaccines, bitcoin, IPOs) than on research.

When Airbnb and DoorDash went public last week, both stocks were massively oversubscribed, in what appeared to be major buy-in from the retail trading community. Airbnb opened on Thursday at $146/share, more than double its $68 IPO price and marking one of the biggest opening day rallies ever. This gave the company a valuation over $100 billion, even though for first nine months of 2020 it posted a net loss of $697 million on $2.5 billion in revenues.1 Paying a premium for future growth is what investing is all about – but where’s the limit?

There are a few sentiment models out there – most notably the Citigroup Panic/Euphoria Model – flashing signs of market optimism and euphoria. The American Association of Individual Investors (AAII) found in its most recent December survey that 48.1% of investors identified as being bullish, which is well above the historical average of 38%.2 In short, there is growing evidence that investors are becoming more optimistic and confident, which in my view tends to make the market more vulnerable to selling pressure. Seeing as there has not been a correction of -10% or more since the March lows, I think we’re due for one soon.

Indeed, upside volatility tends to invite downside volatility, particularly in areas of the market that performed the best off the bottom (so far in this cycle that’s growth and Technology). I’m seeing a classic tenet of stock market investing playing out now – just as investors get comfortable with a rally, the equity market finds a way to deliver a reality check. The market never fails to test investor patience, and I think we should expect a sharp pullback in the first half of 2021 to weed-out some of this newfound enthusiasm and optimism.

If a correction does in fact happen next year, it should not come as a surprise. If you look at the S&P 500 over the last 40 years (1980-2020), you’ll find that not only are corrections frequent, they’re the norm. The average intra-year correction for the S&P 500 since 1980 is -13.8%! In fact, it’s very rare to get a year where the S&P 500 doesn’t fall at least -5% at some point within the twelve-month period. It’s only happened twice in the last 38 years (1995 and 2017), when the S&P 500 declined just -3% intra-year. 3

In 2021, I think we’re going to see a correction more in-tune with the longer-term average, and I think it would be wise for investors to brace for it. Having a diversified portfolio is a good place to start. I think a correction and a subsequent bounce-back could generally favor some of the underperforming sectors and styles in the equity markets, with capital rotating from high valuation names to low valuation names. At Zacks Investment Management, I think our All-Cap Core Strategy could be well-suited for the volatility and rotations I expect next year. We buy stocks with improving fundamentals and sell stocks with deteriorating fundamentals, with no particular allegiance to growth or value or any style. In past years, All-Cap Core has been successful at limiting downside capture, which I think could be valuable to investors in 2021.
Bottom Line for Investors

There’s an old Wall Street adage that investors should “buy the rumor and sell the news.” In the realm of the vaccine, this adage may have already played out – investors rushed into stocks on news of the vaccine’s development and approval, and they may end up selling when the vaccine is actually distributed. I think the “sell the news” side of the equation will land in the first half of 2021.

At the end of the day, however, an investor with a well-diversified portfolio aligned with their goals should not have much to worry about. A sell-off may provide a strategic opportunity to rebalance your portfolio, or if your asset allocation needs adjusting based on a change to your long-term goals or needs, a correction may be a good time to consider implementing it. Otherwise, I think it is good to mentally prepare for a correction, so you can avoid any knee-jerk reactions when it arrives.


1 New York Times. December 11, 2020. https://www.nytimes.com/2020/12/11/business/dealbook/airbnb-ipo-chesky.html

2 AAII. December 10, 2020. https://www.aaii.com/sentimentsurvey

3 J. P. Morgan. November 30, 2020. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer


Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

“The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.”