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Stocks up 1.3% on Week; Seasonal Surge Underway
December 18, 2020

In this strategy briefing…

The positive seasonal trends for December are underway. Despite a shaky start to the week on Monday with the market opening higher and finishing lower, the S&P 500 rallied hard on Tuesday (12/15) right ... – Tom Lee's Equity StrategyRead more
Coincidently, as I was preparing for this week’s note, I came across a quote from Peter Lynch, the legendary portfolio manager of Fidelity’s Magellan Fund between 1977-1990. Peter noted that “Far more money has ... – Technical StrategyRead more
Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2020. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the second half ... – Recommended Stock IdeasRead more

FSInsight Investment Views

Near Term View: Health, Economic Data Point to Better 2H20 for Cyclicals, Value
‘20 Target: 3,800 (YE P/E 19.7x · 2021 EPS $193)
Granny shots: GOOG, AAPL, CSCO, XLNX, GRMN, MSFT, MXIM, LEN, KLAC, MNST, OMC, GWW, INTC, LOW, AMZN, EBAY, TSLA, PYPL, AXP, BF/B, PM, NVDA, QCOM

Tom Lee's Equity Strategy

Tom Lee
Previously Chief Equity Strategist at J.P. Morgan from 2007 to 2014, top-ranked by Institutional Investor every year since 1998.

Stocks up 1.3% on Week; Seasonal Surge Underway

The positive seasonal trends for December are underway. Despite a shaky start to the week on Monday with the market opening higher and finishing lower, the S&P 500 rallied hard on Tuesday (12/15) right in typical seasonal fashion and posted a strong close on Friday – finishing up 1.3%. on the week. And given headlines from Washington around the fiscal relief package and government shut down, I’d consider this a win.

On the COVID-19 front, the virus is retreating in (in large numbers) everywhere except the United States. And when the US finally reaches its apex on Wave 3, we should see COVID-19 globally rolling over. Looking at daily cases per 1mm residents, the US ranks #9 in the World. But it is the highest of major nations. For context, Lithuania and Croatia are top of the list with 1,129 and 966 cases per 1mm which is roughly in line with the massive spread we saw in North Dakota and South Dakota.

Stocks up 1.3% on Week; Seasonal Surge Underway

And if there is one State holding the US back from rolling over it is California.

The Golden State reported upwards of 50,000 cases in a single day this week. At current levels, this accounts for about 25% of all daily cases in the US. California only represents about 12% of the population.

And looking at daily cases per one million, California’s are approaching 1,000 which is nearly double what New York State saw at its peak. Wow.

So, clearly something is going very bad there. Cases are rising in the face of very strict lockdowns.

Excluding California, COVID-19 is rolling over in the other 49 states.  Well to be more precise, it is also rising in some other states, but none are seeing an outbreak of this size and scale. And as we are still in the holiday season, the threat of a renewed spread remains high.

Strategy: 2021 Year Ahead –> “Pause that refreshes” leads to ~25% rally

It is natural instinct to think a ‘boom’ in 2021 is too optimistic. One can point to healthy levels of spending already. Or one can cite the destruction of the US economy. But overall, I think there are several reasons that 2021 should resemble the performance we have seen in the second half of 2020. But I don’t think it will be a straight ride up.

History says stocks are likely to correct in February -April 2021 with a 10% dip to 3,500. The 1982 and 2009 bull markets provide useful context. Both saw prodigious stock gains in the first 12 months. And then a deep pullback. If we mirror the 1982 analog, the correction starts in February 2021. If we mirror the 2009 analog, the correction starts in February 2021.

Stocks up 1.3% on Week; Seasonal Surge Underway

In other words, there is going to be a period of major market turmoil. Be ready for this. And using our analogs, history says stocks are likely to correct in February – April 2021 with a 10% dip to S&P 500 3,500. So, I’d recommend accumulating some dry powder in January 2021 to capitalize on that sell-off and allocating to ‘epicenter’ stocks.

But overall, I expect 2021 should be more of the same as 2H2020 and see a strong stock market, the economy surging, an easy Fed, and cash coming off sidelines. That is not to mention: (i) COVID-19 is waning and there have been positive developments on the vaccine front, (ii) there will be a massive unleashing of pent-up demand (consumer + capex), and (iii) a falling VIX that is likely to average below 20 through 2021 and 2023. Once through this period of market turmoil, I see the combination of these factors pushing the market up 25% in the second half of the year to S&P 500 4,300.

So, where to put that dry powder to work in January? I like Consumer Discretionary, Energy, and Industrials. And yes, you heard that correctly, Energy. And no, I am not saying that I think oil is going to become more and more popular. But I do see strong demand recovery on the horizon, and context is important. Valuations are far from being stretched: Compared to the other GICS 1 sectors, Energy is at the bottom from a 2021E Price to Book (P/B) perspective and at rock bottom Price to Sales Ratio (P/S). And oh yeah, the price charts from the Energy sector have not been this bad since roughly the Moby Dick era so it certainly a non-consensus strategy.

Bottom Line: The December seasonal surge is underway. Looking forward to 2021, history says stocks are likely to correct in February -April. Overall, I expect 2021 should be similar to 2H2020 and see the most opportunity within Consumer Discretionary, Energy and Industrials.

Figure Comparative matrix of risk/reward drivers in 2020
Per FSInsight

Stocks up 1.3% on Week; Seasonal Surge Underway

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

Stocks up 1.3% on Week; Seasonal Surge Underway
signature of Tom Lee
Tom Lee, Head of Research

Technical Strategy

Robert Sluymer
Former Managing Director leading RBC’s U.S. Technical Research team with over 26 years of expertise in investment research and technical analysis.

A Q1 Pullback Appears Likely but Temporary

Coincidently, as I was preparing for this week’s note, I came across a quote from Peter Lynch, the legendary portfolio manager of Fidelity’s Magellan Fund between 1977-1990. Peter noted that “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves”. I view this as sage advice heading into Q1 2021 as all us on the Fundstrat macro team assesses the risks facing investors early next year. If you are interested in more of Peter Lynch’s food for thought quotes they are readily available on the internet or at this link (click here)

As I noted here over the past few weeks, I am expecting a pullback in Q1 that is likely in the 7-10% range over a period of 2-4 months. I obviously cannot say for certain the exact date when the correction will begin, but my read of the technical data at this point is for further upside in January with a tactical peak developing early to mid-February. This week’s chart below outlines a likely roadmap through Q1.

Stocks up 1.3% on Week; Seasonal Surge Underway
Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves”.
Peter Lynch

So what should an investor do? If you happened to miss the Fundstrat Macro webinar this past Thursday (click here), Tom Lee, Brian Rauscher and I outline our expectation for equity markets in 2021. Interestingly, while we reach our conclusions independently, we all agree that a pullback in Q1 is likely to be temporary and an opportunity to increase exposure to cyclical stocks. Pullbacks are always unnerving as they develop, but it is important to remember that 7-10% corrections are consistent with the normal, stair-step pattern of higher highs and higher lows that define the uptrend of a longer-term bull cycle. For the active market timing trader running a higher octane, higher risk portfolio, I recommend trimming exposure in early Q1 and having cash ready to redeploy on the pullback. However, returning to Peter Lynch’s quote above, longer-term investors should stay focused on the underlying bullish market cycle, view pullbacks as temporary and as an opportunity to revisit many of the leading cyclicals at better entry points heading into Q2.

Happy Holidays all and thank-you for your support in 2020!

Figure: Weekly Sector Review
Source: Fundstrat, FactSet

  • Technology is bouncing back from the lower end of its 2-3 month consolidation as more cyclical sectors, notably financials and energy, pause after strong surges earlier in December.
  • Materials interestingly, bounced back from just above its 50-day relative performance moving average keeping its uptrend intact.
  • In contrast, safety sectors, such as staples, healthcare and utilities remain in relative downtrends while materials bounced back after a brief pullback.
Stocks up 1.3% on Week; Seasonal Surge Underway

Figure: Best and worst performance sectors over past 3 months

Stocks up 1.3% on Week; Seasonal Surge Underway
signature of Robert Sluymer
Robert Sluymer, Managing Director and Technical Strategist

GRANNY SHOTS: Best bets in 2020

GRANNY SHOTS: Best bets in 2020 - Week 51

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2020. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the second half of 2020.

Figure: Granny Shots are the “best of the best”
Stocks which appear in multiple themes. Source: FSInsight

Stocks up 1.3% on Week; Seasonal Surge Underway

Figure: Granny Shots Portfolio Performance
Monthly. Source: FSInsight. FactSet as of 12/17/20

Stocks up 1.3% on Week; Seasonal Surge Underway

Figure: Intersection of investment recommendations by strategy
As of 12/17/20, Source: FSInsight, FactSet

Stocks up 1.3% on Week; Seasonal Surge Underway

The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by
5180 bps since its inception (S&P 500 is up 43.4% during the same period).

US Policy

L . Thomas Block
Formerly Global Head of Government Relations at J.P. Morgan for 21 years, and previously served as Legislative Assistant and Chief of Staff in the House, and Legislative Staff Director in the Senate.

Omnibus Spending & COVID-19 on Table; Shutdown Possible

Congress appears on the verge of approving an Omnibus Spending Bill to fund the US Government (USG) through the end of the current fiscal year that runs until September 30, 2021 and a $900B COVID Relief program. Without some action by midnight there would be a government shutdown.

One alternative that is being considered is a short-term Continuing Resolution (CR) that would fund the government for a few days while work is finished on the COVID Relief package. The other alternative is to have the government suffer a short-term shut down over the weekend with passage of a budget and relief bill on Sunday or Monday.

A breakthrough could be announced at any time; but the broad outline of the COVID Relief package is legislation that contains the following: an individual $600 stimulus check for each adult and child under age 17, 10 weeks of extended unemployment that would include a $300 weekly supplement from the federal government, a new PPP small business loan program, and money for schools and vaccine distribution. There are other ideas such as funds designated for art and cultural institutions and an airline employee program that are being negotiated.

While all the Congressional leaders agree that a deal is near, a last minute complication has been a proposal by Republican Senator Pat Toomey to close down the Fed’s emergency lending program that was created by the CARES Act passed in March. There is concern that the language is too broad and could limit future financial intervention by the Fed if needed to prop up the economy. More narrow language seems like a possible compromise.

While Congress writes the final relief provisions there may be a need for a short-term CR in order to avoid a two- or three-day government shut down. Then, the main legislative hurdle is the need for the Senate to obtain unanimous consent to get a bill passed without the usual time for debate. There are a few Republican Senators who oppose the nearly $1T relief package and they could show their opposition by blocking a short-term government funding bill.

Both Speaker Pelosi and Leader McConnell have vowed to stay in Washington until a joint government funding and COVID relief deal is done. I expect the package to be complete and passed in the next few days, but there could be a near meaningless government shutdown over the weekend.

signature of L . Thomas Block
L . Thomas Block, Washington Policy Strategist

Fed Watch

FOMC Leaves Rates and Purchases Unchanged, Powell Opines on Inflation

The Fed had its final meeting in the most active year for Central Banking since the Global Financial Crisis. The headline is that Fed members continue to project no upward change in rates for at least 3 years and will continue asset purchases at the same levels for the foreseeable future. In other words, no fireworks. The tone and outcome were nonetheless positive for markets in our view.

Some had speculated that the Fed might engage in further accommodative action like buying longer-dated debt as it did about a decade ago. Chairman Powell responded to questions about why they decided not to do this by explaining that long-term interest rates are already low. He said monetary policy, particularly since we can see through to mass vaccinations, is not the most appropriate or effective tool to respond to short-term economic challenges. He again resolutely implored fiscal authorities to act quickly as, in his view, assistance from them will be the most effective in getting assistance to struggling businesses and families. It is ironic and unfortunate that disputes over the future of lending programs have been thrust directly into that debate. He noted that monetary policy is not a good tool to aid industries that are struggling due to lockdowns and changed consumer behavior from the virus.

The sub-text is a bit more bullish for markets than might meet the eye and may be only apparent to those who have reviewed the Summary of Economic Projections (SEP). The bottom line is that accommodation is the same, and economic projections are more positive, which is good for equities. Of course, Powell also mentioned that his agency is ready on a moment’s notice to ratchet up asset purchases if the situation warrants it, i.e., taking longer to get inflation targets and maximum employment than the current SEP would indicate. Despite a lack of further accommodative action, the Fed’s economic projections have gotten significantly rosier. The Fed’s language also changed from terms implying indefinite support to ‘bridging the chasm’ until demand can recover. The Fed raised its GDP growth projection and forecast a lower unemployment rate than previously for 2021, reducing projections from 5.5% to 5%.

One particularly bullish item that we wanted to highlight is that Jay Powell specifically said that in addition to the far more accommodative Adjustable Inflation Target framework that the Fed will not be considering price rises that will naturally accompany recovering demand as the beginning of a sustained inflationary cycle. This means the punch bowl will be out later than ever, in Fed speak. The risk of a 2013-style’ taper tantrum’ seems to be something relegated to the past for the foreseeable future.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 0.94% up from 0.90% last week.

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