Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Just about six months to the day since the pre-Covid peak on 2/19, the S&P 500 posted a new all-time high on 8/18. The S&P 500’s 51% recovery in 104 days since 3/23 (following the -34% waterfall selloff) has been remarkable. However, it is important to not lose sight of the long term bull market opportunity that remains in our view. For example, bull markets historically have seen 155% gains over 1233 days. And the last four bull markets following recessions have actually exceeded these numbers- gaining 259% on average over 1814 days. The S&P 500 breakout to new highs is also indicative of above average returns over the next 6-12 months. Since 1978, the S&P 500 has seen an average return of 12% over the next 12 months following new highs (and has been positive 85% of the time). This data contributes to our positive view on equities over the longer term.
That said, in the short term there are some reasons for caution/patience with new purchases in our view. Investor complacency remains very high. And with a strong Q2 earnings season over, the upcoming election will likely gain increasingly more attention as we enter the seasonally softer period of the year (September-October). Credit spreads have also ticked slightly higher, which has corresponded with consolidations during this bear market recovery. Moreover, it is not uncommon for the S&P 500 to experience slight pullbacks following breakouts to new highs (more of a mixed bag in the short term historically). So we would be selective and exercise some patience with new purchases in the short term. However, we would use any weakness in the coming weeks as a buying opportunity for the long term.
At the sector level, performance continues to be bifurcated (with rotations) between the relative winners and losers of the pandemic. The consumer discretionary sector is a good microcosm of this dispersion. For example, the sector experienced a relative strength breakout this week on good earnings reports. But while the sector is 15% higher than the 2/19 peak, performance has been dominated by internet retail, homebuilders, and home improvement areas (fundamentally strong through the pandemic); while areas like hotels and casinos (more hard hit fundamentally) are still 42% lower than 2/19 levels. Consumer discretionary remains one of our favored sectors, due in part to its exposure to areas doing well right now but also those with longer roads to recovery. We would be buyers on a pullback.
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