Weekly Market Guide - Butler Financial, LTD
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Weekly Market Guide

February 05, 2021

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

The S&P 500 has rebounded, looking like it will shake off last week’s short term pullback of -3.5% in 3 days. The S&P 500 index as a whole did not get completely oversold, but short term stochastics have crossed over back to positive for the short term. We still view a February pause as likely (historically a seasonally softer month of the year), and use the recent highs and lows as initial technical resistance and support levels to monitor (~3700-3900 range). While the S&P 500 index has not moved much lately, there have been much wider differences beneath the surface. We see many opportunities to accumulate favored stocks as they have pulled back near support levels, particularly in the more “recovery-oriented areas.”

45% of S&P 500 companies have reported Q4 earnings thus far, and in aggregate results have been strong. 81% of companies are beating bottom-line estimates by a 15.9% surprise. The strong Q4 results bode well for equities in 2021. An earnings recovery is expected this year, and consensus estimates continue to trend upward. This is supportive of equity market momentum, along with our above-consensus S&P 500 earnings estimate of $175 (base case). Price reactions to results, on the other hand, continue to be generally negative with the average price change being -0.9%. Since earnings season began, the technology-oriented areas have generally outperformed (on strong earnings) while the “recovery areas” have consolidated some. We view this as normal, following very strong gains since early November in those areas, which has created some buying opportunities there in our view.

For example, we recently upgraded the Energy sector to Equal Weight, and would use the recent pullback as a buying opportunity for investors that have been underweight (our favored subsector is Exploration & Production). The energy sector has underperformed tremendously since oil prices collapsed in 2014, underperformance that continued during the pandemic. However, technical trends have begun to improve and oil prices have advanced to $56/barrel- the highest level in a year. We believe this bodes well for Energy stocks, which are still ~25% below year ago levels. Additionally, many stocks across the various subsectors offer high dividend yields for investors in search of income.

Also, the yield curve and interest rates have been major influences on the relative performance of Financials in recent years. Accordingly, a steepening of the yield curve in recent months has been supportive of Financials sector performance trends. After consolidating within its upward trend in recent weeks, the yield curve was able to break out to new recovery highs. This bodes well for Financials sector performance in our view and, as such, we would continue to accumulate favored stocks in the sector.

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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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