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December 3, 2020

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

November equity market returns were for the record books, as the S&P 500 posted a 10.75% gain, the Dow Jones Industrial Average was up 12% (the best month since 1987), and the Russell 2000 was up 18% for its best month on record. The MSCI All-Cap World index also posted its best month ever, up 12% in November. The announcements of 3 vaccines with 90%+ stated efficacy rates spurred an enormous global rotation into the most economically-sensitive areas of the market, as investors began to see a light at the end of the tunnel in our quest for a return to normalcy.

The enormous market strength over the past month bodes well for returns over the next 6-12 months in our view. We maintain a positive outlook for equities in the year ahead, due to our expectation for 3+ vaccines to fuel a reopening process as 2021 progresses along with still exceptionally low interest rates, as well as the potential for fiscal and monetary stimulus to boost the economy as needed. This view also hinges on the likelihood of a divided government which drastically reduces the chances of aggressive legislative changes that can alter the fundamental outlook over the longer term, including tax increases. In our base case 2021 scenario, we believe earnings can rebound to $175. And given the very low interest rate environment, we believe market multiples can remain relatively elevated particularly as investors discount the economic recovery. We apply a 23x P/E multiple (down from the current 26x P/E), which results in a base case potential S&P 500 target of 4,025 in 2021.

However, markets do not move in straight lines and it would be normal to see equities consolidate in the short term as they digest the past month’s strength. Concerns over the virus spread and a continued rise in hospitalizations are resulting in increased shutdowns. This is seen in US mobility and engagement readings that have rolled over, and will likely result in economic softness over the coming weeks and months particularly in the continued absence of additional fiscal aid. We also need to monitor the two Georgia Senate runoffs on January 5th, which if both Democratic candidates win could drastically alter the legislative agenda in 2021.

We recommend pro-cyclical exposure to equity allocations; but following the recent run-up in many of these areas, we would patiently accumulate with new money at current levels and use consolidations or pullbacks as a better buying opportunity. With so much focus on the “recovery” areas right now, we also remind you not to forget about the areas operating best fundamentally through the pandemic (i.e. large cap tech-oriented, health care, and select consumer subsectors). Many stocks in these favored areas have been consolidating prior strength for the past several months and appear to be near better entry points for the short term.

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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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