Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Equities have been able to bounce from oversold levels in the past few days and investors are closely monitoring fiscal stimulus discussions. Raymond James DC Policy analyst Ed Mills believes we are probably down to the final negotiations for a chance at additional fiscal stimulus before the election, and his contacts are skeptical on the ability for a deal. Both sides are still fairly far apart despite the Republicans reportedly raising their offer to $1.6T (Democrats have been at $2.2T). Encouragingly, talks have heated up with both sides at least publicly showing some willingness to negotiate. Numerous companies have announced layoffs recently, Democrats and Republicans are getting pressure from unions and businesses for aid, and President Trump is looking for an economic win in the election run-up. We view a fiscal package prior to the election as a wildcard and still a low probability. If an agreement is made, we believe it would be a positive surprise for the market and out-of-favor cyclical areas would likely rally significantly.
With our view that a fiscal package is probably not coming before the election, the resulting lack of support for consumers will be a headwind for equities. However, monetary support is firmly in place- providing downside support as an incentive for investors to buy weakness. Also despite a choppy macro environment, the recovery is underway. Softer consumer data recently is being offset by strong housing and manufacturing. The current recovery rate and expected improvement over the next 12 months supports buying equities. Our 2021 S&P 500 base case target is 3600; and in the event of positive surprises to the economy and corporate earnings, as well as potential vaccines and therapeutics, we use a bull case target of 3910. Our bear case scenario is 2775, although we apply a very low probability given the unlikelihood of a double dip recession with the lag effect of stimulus and likely vaccine.
We continue to view the market pullback as a normal correction as opposed to a shift to a bear market. With an understanding that the market may be choppy over the next month (outside of a fiscal package), we would accumulate market weakness. At the sector level, we maintain our recommendation for investors to keep a foundation of market leaders in the Technology, Communication Services, Health Care, and Consumer Discretionary sectors while also beginning to increase exposure to “recovery” areas, in particular Industrials, Materials, and select Consumer Discretionary stocks.
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