December 18, 2020
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary
Equity markets have sustained their advance with areas most levered to the economic recovery showing the strongest momentum. The small caps have now advanced 27% since the end of October and are now outperforming the S&P 500 year-to-date. At the sector and stock level, the hardest hit areas from the pandemic have generally seen the greatest upside. For example, Energy and Financials (down 52% and 22% respectively from 12/31 through October) have led the charge higher by 37% and 20% respectively since then. Also, S&P 500 stocks down 30% through October are up 36% on average since, a stark contrast to those up 30% prior to November being up (only) 11.6%. This phenomenon, spurred by very positive vaccine data and optimism over the recovery in 2021, is also being seen globally with a similar relationship between worst performers prior to the vaccine news correlating with best performance since then (led by some of the hardest hit Latin America and European countries).
The improved breadth is positive for equity market momentum over the intermediate term in our view. It has also created a good environment for active management with better opportunities for stock selection across all areas of the market. We recommend pro-cyclical exposure to portfolios, and believe it is important for investors to find a balance between the areas operating best through the pandemic along with the areas most levered to the economic recovery. Accordingly, our overweight-rated sectors are Technology, Health Care, Communication Services, Consumer Discretionary, and Industrials.
We remain positive on equities over the next 6-12 months due to our view of 3+ vaccines allowing an economic reopening as 2021 progresses, along with fiscal and monetary stimulus supporting the recovery and the likelihood of interest rates remaining lower for longer. This should support an earnings recovery and allow valuation to remain elevated (albeit lower than current levels). We maintain a base case S&P 500 target of 4025 (using $175 earnings and 23x P/E). And while the current equity momentum could continue through year end and into January, we do want to acknowledge numerous items that could impact volatility. Fiscal talks are currently ongoing (and we believe something likely gets done), but the absence of additional fiscal aid (with the virus surge and localized shutdowns impacting the economy) would be a setback. Additionally, the January 5th Georgia Senate runoffs have the potential to alter the legislative agenda dramatically in the event of a Democratic sweep. Therefore, our overriding view remains positive on equities. But we believe it is prudent to accumulate over time and make portfolio adjustments in a pragmatic way, particularly with new money coming in at current levels.
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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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