Weekly Market Guide - Butler Financial, LTD
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Weekly Market Guide

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

Last week’s 8% pullback was a much-needed reality check that risk still exists in this market. However, this week, the market returned to its bullish posture as once again the Fed came to the rescue by supporting the corporate bond market, resulting in tighter spreads, which tend to be positive for risk assets. Additional drivers to recoup some of the lost ground from last week included: positive clinical data on a potential COVID-19 treatment, proposal of a $1T stimuluative infrastructure program, and economic data suggesting that the recovery (although mixed) is still showing signs of improvement offset by rising risks of higher hospitalization in new hot spots across the US. All in all, the biggest influence on the market continues to be the old mantra, “Don’t Fight the Fed”. With the Fed not backing away from prior promises of supporting the market, we continue to believe the positives outweigh the negatives, and would continue to use pullbacks opportunistically.

From a technical perspective, volatility was bound to happen at some point given the vast amount of uncertainty and investor complacency. Similar to what we saw last week, sparks of volatility can take place as the market consolidates recent gains. However, near-term internals are much better as overbought conditions have been removed and alleviated some of the recent complacency that had crept into the market. However, moving forward, odds of periods of volatility are likely to remain elevated as earnings must meet expectations given the strong rebound in valuations and continued uncertainties. Additionally, the MACD recently crossed could point to some waning momentum in the near-term, but given that the market is in an uptrend, does not derail the market outlook longer-term. If a pullback does ensue, we would expect the drawdown to be rather contained as there continues to be record piles of cash on the sidelines that could add as support to move the market higher.

From a sector perspective, we favor Technology, which continues to be a market leader, and is seeing broad strength with software, hardware, and semis all near record highs, Health Care, and Communication Services. We would fade any rallies in the more defensive sectors, as areas such as Utilities and Consumer Staples recently saw relative performance move to new lows despite the market swoon seen last week. As the market continues to discount the recovery in the macro, the cyclical sectors could be areas to watch as the equal-weight Consumer Discretionary, Financials, and Industrials all saw higher lows on a relative performance.

While upside to our base case price target of 3,111 is limited, the record fiscal and monetary stimulus (with potentially more to come), continued momentum on effective treatments for COVID-19, and improving economic conditions, continues to be supportive of possible upside towards of bull case scenario of 3,384 by year-end.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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