Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary
This week’s positive news on a potential COVID-19 vaccine has fueled a sharp rotation within the market as the relative beneficiaries of the stay-at-home environment gave way to the areas most impacted by the pandemic. For example, the underperforming industry groups year-to-date have gained 6.1% on average since last Friday, whereas all other areas are roughly flat (0.5%) on average since then. This rotation on vaccine optimism shining a “light at the end of the tunnel” is spurring questions around portfolio re-positioning toward the laggards.
Although this time the rotation may finally last, we recommend a more pragmatic approach to portfolio changes and prefer to build positions as the technical trends are sustained over time (particularly with the virus spreading rapidly right now). Our favored areas for portfolio rotation adjustments are the small caps, industrials, and materials, followed by the financials. Capital to increase exposure to these areas can come from select areas of Technology. Portfolio diversification is building importance once again, as the market becomes less dependent on a small segment of stocks that have dominated the stay-at-home environment. This not only creates more opportunity broadly across all areas of the market, we also view it as a positive for overall market strength.
Technically, the sharp S&P 500 up-move over the last 10 days (9.2%) is suggestive of above average returns over the intermediate term. After such sharp gains historically, it is normal to see some consolidation in the short term; however, moves of this magnitude are very often also followed by strong returns over the next 6-12 months. For example over the past 15 years, the S&P 500 has experienced a >7% initial move in 10 days only 20 times before this week. The average return over the next 6 and 12 months has been 14.3% and 20.2% respectively (with 88% and 94% positive rates). This compares favorably to 6 and 12 month returns in all periods of 5.3% and 10.8% respectively (with 76% and 82% positive rates).
Fundamentally, a very strong Q3 earnings season has continued the upward trend in S&P 500 earnings estimates. And while interest rates have moved marginally higher recently, the S&P 500 equity risk premium (S&P 500 earnings yield vs 10 year Treasury yield) is 3.0%. This remains historically elevated and supports our view that valuation multiples can remain lofty given exceptionally low interest rates. Since 1962 (following at least a 3% reading), the S&P 500 has seen positive returns over the next 3 years every time with an average annualized return above 8%. Headwinds remain (i.e. rapid virus spread, Senate control, size and timing of fiscal aid), but we would use pullbacks as buying opportunities for the longer term.
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
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.
International Disclosures
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monetaire et Financier” and Reglement General de l’Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Broker Dealer Disclosures
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.
Artificial intelligence is creating new, more complex cybersecurity challenges. It may also hold the...
Review the latest Weekly Headings by CIO Larry Adam. Key Takeaways Gridlock in Congress remains the...
Retirement and Longevity October 18, 2024 The 2025 Social Security cost-of-living adjustment (COLA) has...