Weekly Market Guide - Butler Financial, LTD
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Weekly Market Guide

November 20, 2020

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

Short-Term Summary

Equity market momentum remains solid- grinding slightly higher over the past week to begin December and following a historically strong November. The S&P 500 is 13% higher since October 30th, while the average stock and small caps are up 19.5% and 24% respectively. This enormous strength and improved market breadth are technically positive for forward returns over the longer term. For example, returns over the next 3, 6, and 12 months have historically been above average following 10+% returns in one month. However, returns over the following month are typically below average.

Technically, the base breakout to new highs remains the dominant force, and the three-month base could make the current wave last longer and gain to a greater degree. But we would not be surprised to see consolidations or pullbacks occur at some point in the short term. We note that the S&P 500 is still flirting with overhead trend line resistance at ~3700, along with elevated investor optimism and very low put/call ratios. These are not great timing indicators, but do suggest the need to refrain from unbridled enthusiasm. If the market moves lower, watch horizontal support at 3550, and then the 50DMA (currently at 3507). A 3-5% pullback to these levels would be very normal and healthy for equities in our view. We would use pullback periods as a buying opportunity for the year ahead.

Our base case assumption of 3+ vaccines with strong efficacy rates should allow an economic reopening as 2021 progresses, a tailwind to the global economic recovery. We also believe additional fiscal aid will ultimately get done (potentially some by the end of December). The likelihood of a divided Congress (Georgia Senate runoffs on Jan. 5th are a key variable to monitor) also would remove longer run concerns over aggressive legislative changes to the tax code. We believe that S&P 500 earnings can reach $175 in 2021 and that valuations can remain elevated (albeit move lower from current levels) due to the likelihood of low interest rates and inflation. Our 23x P/E assumption results in a base case S&P 500 target of 4025 (~9.5% upside from current levels before dividends).

In sum: We remain positive on equities over the next 6-12 months, and recommend a pro-cyclical exposure to portfolios. Strong technical momentum has many areas overbought in the short term. As consolidations or pullbacks occur within favored sectors and stocks, we would accumulate for the longer term recovery ahead.

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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.

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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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