Biggest lesson in a wild trading year

Invesco global chief market strategist Kristina Hooper tells Reuters' Fred Katayama about the key takeaway for investors in a year that saw the S&P plunge 35% in March and surge back 70%. She also gives her outlook and market picks for 2021.

Video Transcript

FRED KATAYAMA: Stocks drifting lower Thursday, the final trading day of what has been a wild but stellar year for the markets. Let's recap the year that was and take a look at the year ahead with Kristina Hooper. She is Chief Global Market Strategist at Invesco, joining us from her home in Greenwich, Connecticut. Welcome, and good afternoon, Kristina.

KRISTINA HOOPER: Fred, so great to be with you.

FRED KATAYAMA: Good seeing you again. So let's take a look back. We saw, you know, the S&P 500 plunge 35% in March, zoom back 70% into December's highs. What are the takeaways, lessons that investors should take from this pandemic-filled year?

KRISTINA HOOPER: Well, I think it's ironic that in the year 2020, we had so little visibility. And it's clear that being hit by this pandemic and all the fear that it created sent stocks down so much. But all we needed to do was go back to the global financial crisis, to that playbook to know that stocks would go up once the Fed intervened.

And that's exactly what happened. This has been a Fed-fueled, a giant Fed-fueled rally that we've experienced, really for the last nine or so months. And to me, that is the greatest lesson of 2020 is that even when you don't have visibility, as long as the Fed steps in, you're likely to have a good year for stocks.

FRED KATAYAMA: Good point. So follow the Fed. You know, we've had stimulus now. The package has been approved. We've got the vaccines being rolled out, and the elections are over, although there is Georgia still. Did investors get enough of what they wanted this year-- it almost sounds like Christmas-- such that this momentum will carry over into 2021? Or are there headwinds that we've got to be leery of?

KRISTINA HOOPER: Yes and yes. So I think that, certainly, we have a lot more visibility about 2021, and that should be a real positive, especially when it comes to the vaccine. Again, if we compare this to the global financial crisis, we didn't have an obvious solution to the global financial crisis. It was about building confidence over time.

Here, we actually have a pretty easy solution. I'm sure it was hard to arrive at, but now that we do have vaccines that have been proven to be quite effective, once those are broadly distributed, this should be an environment in which we see a strong economic rebound. And I expect the stock market to discount that in advance, of course, and that's what we're already seeing.

But that doesn't mean we're not going to have headwinds because there are going to be a number of factors-- negative newsflow around rising infection rates, newsflow around distribution hiccups, all kinds of things that are going to provide short-term headwinds and could create down days and down weeks for the market, as well, of course, as negative economic data, which is likely to come, given that we are slowing down as a result of the rise in infections. But all in all, 2021, I expect to be a good year for markets.

FRED KATAYAMA: If you're looking at the S&P 500, how big of a gain do you anticipate next year?

KRISTINA HOOPER: Well, I expect that much of the gain will occur in the first half of the year, again, in anticipation of a strong economic rebound. I don't see a down period once we do have broad distribution of the vaccine, but I don't expect to see as big gains. I'm much better at direction than exact numbers, but I would expect we could see a move up of 10% or more in the S&P 500 next year.

FRED KATAYAMA: And lastly, Kristina, since you're a global strategist, what would you recommend in terms of asset allocations geographically, US versus, say, international?

KRISTINA HOOPER: Well, I think we want to ensure that we have adequate exposure outside the US. And where I would overweight is emerging markets, especially Asia emerging markets. So many of those countries-- China, South Korea, Singapore, Vietnam-- have done a very good job controlling COVID-19. And so they are already several steps ahead of where countries like the United States are.

That means they're going to participate more robustly in an economic recovery in the early part of 2021, while it will take us longer. I think we'll ultimately have a robust economic recovery, and one that's far more inclusive than the global financial crisis. But these Asian countries are well ahead, and valuations are attractive there.

FRED KATAYAMA: OK, thank you, Kristina, and also for that takeaway about the importance of the Fed in guiding the markets. Our thanks to Kristina Hooper of Invesco. I'm Fred Katayama in New York. Have a wonderful new year.