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February 12, 2021

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

Roughly 3 months since the positive Pfizer/BioNTech vaccine news on 11/9, equity markets have continued their glide path higher. The S&P 500 is now 11.4% higher since then with outsized performance seen from the small caps (+39.5%), energy (+53.5%), and financials (+25.4%). The only hiccup at the S&P 500 index level was a 4-day 3.5% decline in late January that was quickly overcome by a 5% 6-day rally to new highs. The dominant narrative remains positive for equities- fiscal and monetary stimulus creating a strong tailwind and downside cushion, corporate earnings much better than expected (now positive y/y!), an improving vaccine rollout that may allow the economy to reopen faster, ultra-low interest rates supporting no alternative to equities, along with investor fear-of-missing-out.

At some point, this narrative will shift. The catalyst could eventually be a spark in inflation as the economy reopens, speculative trading activity, timing of the economic re-opening, and/or overly optimistic investor positioning. The one most discussed among investors at the moment is inflation; but with the economy still far from full employment and a Fed that is willing to let inflation run above target for a period of time, we are not overly concerned with the potential for a pick up in inflation (and a tightening of monetary conditions) at this time.

Market participation beneath the surface remains very broad with 88% of S&P 500 stocks trading above their 200 DMA. This supports positive technical trends over the intermediate term in our view. We are mindful of soft seasonality in February historically; but while the market is in its current mood, we expect pullbacks to likely be short and shallow. There are numerous levels of technical support in the 3800-3700 area (3-5% downside from current levels).

For investors looking to put money to work, we see plenty of opportunity at the stock level across sectors, particularly in health care, industrials, materials, and some energy. Real estate is also showing some technical improvement and looks like an opportunity to accumulate. For Value vs. Growth, we recommend a balanced approach; but with new capital, we would be accumulating Value as relative strength is attempting to build an uptrend in our view. We would increase conviction on a relative strength break out. Likewise, we have been discussing the improved trends from Energy and opportunity to accumulate in recent reports. The sector is approaching a break out to new recovery highs, along with a relative strength break out- both of which would be added momentum-confirming signs.

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