Weekly Market Guide - Butler Financial, LTD


Weekly Market Guide

March 5, 2021

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

After abating slightly over the past week, the surge higher in interest rates is continuing today with the US 10 year Treasury yield up to 1.55%. This is spurring an additional pullback in equities, pushing the S&P 500 below  its 50 day moving average. The next level of nearby technical support on the S&P 500 is 3694, followed by the 3500-3600 area (horizontal support levels and near the upward-trending 200 DMA). We reiterate our view that rates are rising for the right reasons, as the economic outlook improves rather than tightening monetary conditions. An improving economy is good for equity markets. Credit spreads continue to trend lower (reflecting a healthy corporate backdrop), and the Fed has not wavered in its dovish stance.

While the pace of the move higher in rates is unsettling equities in the short term, pullbacks are normal. The  S&P 500 is now 5% below its highs for the first time since early November. And the 200 DMA at ~3500 would be ~11% from highs. Importantly, the short term volatility has not changed our positive view on equities for the year ahead, resulting in better upside over the longer term. Accordingly, we would use the pullback as an opportunity to accumulate favored sectors and stocks.

Following a low base of -3.5% real GDP growth last year, along with unprecedented levels of both fiscal and monetary stimulus, economic growth in a reopening this year could be the strongest in decades. With an estimated ~$3.5T in fiscal stimulus committed already, and a likely $1.5-1.9T coming in the next month, fiscal stimulus alone is set to approach 25% of nominal GDP since the pandemic began. With the Fed also remaining accommodative, this stimulus could result in GDP growth well above current consensus estimates of 4.4% in our view. US real GDP growth has not reached 5%+ since 1984, and we believe 2021 could be closer to 6% if our expectations on the economic reopening and fiscal stimulus come to fruition.

If GDP growth approaches a level closer to 6%, we believe earnings could finish 2021 closer to $190 (~37% growth y/y) vs current consensus estimates of $173. In fact, the current 2021 estimate revision trend has been closely correlated to 2010 estimates (out of the credit crisis), as analyst estimates are typically too low out of recessions. If this trend holds through year end, S&P 500 earnings should finish near $185. Valuation is extended with the S&P 500 P/E at 26.5x but will begin to normalize as earnings recover. And while rising rates (given the sharp pace) can remain a headwind to equities in the short term as they continue to rise, we view the pullback as a buying opportunity for the longer term as multiple contraction should not outweigh earnings growth in the year ahead.

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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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