Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Following a three-week rally of 9% that put the index within just 1.5% of previous highs, the S&P 500 has consolidated slightly in recent days. We view the price action of the S&P 500 since the early September highs as a normal digestion of previous strength and are encouraged by investor conviction to continue buying the pullbacks. The potential for choppiness in the short term is there- overbought conditions, impasse on stimulus talks, and the upcoming election to name a few. However, we remain positive on equities over the intermediate term due to expectations of positive vaccine/therapeutic news flow, unprecedented stimulus, and record low interest rates fueling the economic and fundamental recovery over the next 12 months.
Additionally, overall technical trends remain very positive. We note that the percentage of S&P 500 stocks above their 10 day moving average reached 94% in the recent rally. This is not a common occurrence over the past 20 years; and when it has occurred, average returns and win rates (probability of being positive) over the next 1, 3, 6, and 12 months have been significantly better than normal. For example, when the reading has reached >90%, the S&P 500 has averaged a 13.7% return over the next 12 months (with a 94% win rate)- comparing favorably to the 5.6% average return and 75% win rate in all periods.
Earnings season began this week and so far results have been much better than estimates. Only 17 S&P 500 companies have reported thus far (majority of them Financials) but the average surprise has been 19%. This has put upward pressure on S&P 500 earnings estimates for the full quarter which have been revised up 2.1% already. This is a strong start as the 5-year average earnings surprise has been 5.6% for the full quarter, and particularly when factoring in the positive estimate revisions heading into results. On average over the past 15 years, estimates for the quarter have been reduced -5% only for earnings to “beat” these downwardly revised estimates, whereas estimates this quarter actually trended 5% higher. Despite this, the average price reaction for stocks on their earnings so far has been just -1.9%, but we believe this is more a function of the market’s recent strength into results. Overall, we expect favorable earnings trends to continue.
We continue to favor large cap growth. The small caps are improving but relative strength trends keep us from becoming too aggressive yet. We still like the Technology, Communication Services, Health Care, and Consumer Discretionary sectors, along with adding exposure to Industrials and Materials. Also, the emerging markets are giving a price breakout; and we would continue to accumulate on positive intermediate term trends supported by our expectations for a lower US dollar and global economic recovery in the year ahead.
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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.
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