Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary
Since the end of October, there have been numerous data points bolstering our bullish bias to equities over the next 6-12 months, starting with success on the vaccine front. There are now two vaccine candidates with reported ~95% efficacy rates that will be asking the FDA for emergency use authorization in the coming weeks (positive news flow from other companies is likely too). Estimates suggest that ~30M Americans could be vaccinated by the end of 2020 and nearly 1/3 of the US population by the end of Q1. This is a big deal, as vaccinations in the most needed areas (i.e. those most vulnerable, health care, essential workers) should allow economies to reopen as 2021 progresses. Additionally, the likelihood of divided government drastically reduces the potential for tax increases acting as a headwind to the outlook (Georgia runoff for 2 Senate seats on January 5th still). Economic data and corporate earnings reports have continued to improve above expectations. And the Fed remains on hand to support the economic recovery as needed. All of this provides a sense of optimism for the year ahead, and our favored S&P 500 target for 2021 is currently 3910.
However in the short term, the virus spread is surging. 10% of all tests nationally are coming back positive right now. Hospitalizations are at pandemic highs and continue to climb, putting pressure on local communities to implement targeted shutdowns. Additionally, there remains no progress on additional fiscal stimulus and questions remain over its potential timing and size. Sentiment polls and positioning have become more bullish, and many stocks are at overbought levels for the short term. For example, the average S&P 500 stock is up 12% and Russell 2000 is up 15% since the end of October. At the sector level, vaccine optimism has spurred large gains in the most economically sensitive areas- i.e. Energy is up 22%, Industrials up 14.8%, and Financials up 14.5% in just 13 days. This increases the odds of a normal pause or pullback as the market digests this strength.
So while we are positive over the next 6-12 months, we would not be surprised for the road to be bumpy in the coming weeks and months. For this reason, we would use pullbacks as buying opportunities and would be pragmatic in repositioning portfolios toward the areas with more leverage to the economic recovery- i.e. small caps, industrials, materials, financials, and select consumer areas. We recommend accumulating these groups, for investors that have been underweight, as they go through consolidation periods. And would also maintain healthy portfolio exposure to the areas operating best through the pandemic- i.e. technology, health care, communication services, and areas within consumer discretionary. Opportunities at the individual stock level have improved across all areas of the market- a positive for active management as well as overall market trends.
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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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